Gold Report China

CHINA GOLD REPORT
Gold in the Year of the Tiger

About The World Gold Council
The World Gold Council’s mission is to stimulate
and sustain the demand for gold and to create
enduring value for its stakeholders. The organisation
represents the world’s leading gold mining
companies, who produce more than 60% of the
world’s annual gold production in a responsible
manner and whose Chairmen and CEOs form the
Board of the World Gold Council (WGC).
As the gold industry’s key market development

body, WGC works with multiple partners to create
structural shifts in demand and to promote the
use of gold in all its forms; as an investment by
opening new market channels and making gold’s
wealth preservation qualities better understood;
in jewellery through the development of the premium
market and the protection of the mass market; in
industry through the development of the electronics
market and the support of emerging technologies
and in government affairs through engagement in
macro-economic policy issues, lowering regulatory
barriers to gold ownership and the promotion of
gold as a reserve asset.
The WGC is a commercially-driven organisation and

is focussed on creating a new prominence for gold.
It has its headquarters in London and operations
in the key gold demand centres of India, China,
the Middle East and United States. The WGC is
the leading source of independent research and
knowledge on the international gold market and
on gold’s role in meeting the social and economic
demands of society.

China gold report
Contents
Introduction 5
Gold demand in China – a new world of opportunity 8

Origins of gold demand 8
Overview of the early gold market 9
Recent economic trends 10
Demand continues to strengthen in China 16
China’s market share of demand on gold and selected commodities 21
Gold price and seasonality 22
Jewellery – potential demand growth given current low per capita level 23
Investment – an opportunity to play catch up? 27
Industrial demand 40
Central Bank – the People’s Bank of China 45
Supply in China 52
Overview 52
Mine supply 53
Gold producers – domestic and foreign 56
Rising cost of production 58
Mine supply growth – taking a closer look at reserves and resources 59
Recycled gold 65
The long-term outlook for the Chinese gold market 68
Conclusion 70

China gold report

Eily Ong, World Gold Council
Executive summary
The World Gold Council (WGC) believes that gold consumption in China will
continue to catch up with the rest of the world following the deregulation of
the Chinese gold market in 2001. Demand from China’s two largest sectors
(jewellery and investment) reached a combined total of 423 tonnes in 2009 but
domestic mine supply contributed only 314 tonnes during the same year. This
shortfall creates a “snowball” effect as China’s gold industry may not be able
to keep pace with the annual leap in domestic consumption despite rising to be
the world’s largest gold producer since 2007.
Today, gold is regarded as a sign of prosperity, an ornament, a currency and an

integral part of Chinese religion.
Although the country’s appetite for gold has grown, making China the second
largest consumer in the world, demand in China per capita has a lot of catching
up to do to equal that of Western economies. In jewellery, the Chinese per
capita consumption is one of the lowest at 0.26gm when compared to countries
with similar gold cultures. If gold were consumed at the same rate per capita as
in India, Hong Kong or Saudi Arabia, annual Chinese demand could increase
by at least 100 tonnes to as much as 4,000 tonnes in this sector alone. Near-
term inflationary expectations and rising income levels are likely to support
Chart 1: Gold and cumulative gold supply and demand (tonnes) in China
Chart 1: Gold and cumulative gold supply and demand (tonnes) in China
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Cumulative supply (t) Cumulative demand (t) Gold (Yuan/oz)
Source: GFMS Limited, WGC estimates

China gold report
the investment case for gold as an asset class, especially given that Chinese
consumers are high savers and are looking to gold to protect their wealth.
The People’s Bank of China (PBoC) is also playing an increasingly supportive

role for gold on the demand side. PBoC’s gold holdings are currently at 1.6%
of its US$2.4tn total reserves – a fraction by international standards. If PBoC
decides to rebalance its books to its recent peak gold holding as a proportion
of reserves of 2.2% in Q4 2002, WGC estimates it could account for a total
incremental demand of 400 tonnes at the current gold price.
WGC analysis shows that, structurally, supply growth in China could be

challenging unless there is more funding directed to exploration. Assuming the
US Geological Survey’s figures are correct, China may exhaust existing gold
mines in just six years. Despite the strong Yuan, total production costs have also
risen by more than 30% in the last six years due to higher input costs (such as
energy and labour) and lower ore grades.
The outlook for gold in China remains positive and WGC believes that the
balance between demand and supply in the Chinese gold market will continue
to be in disequilibrium.
In the longer term, if China continues to grow at near to the current rate in
economic and wealth terms, gold consumption in China will continue to expand
and has the potential to double during the next decade.

China gold report
Introduction
Gold plays a vital role in Chinese culture. The Chinese have a strong affinity to
gold when compared with Western countries. Gold has been present in Chinese
history since the time of the Han Dynasty and even today is regarded as a sign
of prosperity, an ornament, a currency and an inherent part of Chinese religion.
Weddings are important gold-buying occasions amongst the Chinese. Gold is
also traditionally bought as a gift during the Chinese New Year.
According to the Chinese lunar calendar, 2010 is the Year of the Tiger and the
year which started on 14 February 2010, promises to be a year of excitement,
prosperity and potential good luck for almost everyone. Those who make a real
effort will enjoy an auspicious wave of success when the brave and resilient
Tiger rules. Some Chinese also describe 2010 as the Golden Tiger Year.
Today, China is the second largest gold consumption market and the world’s
largest producer. Gold demand from China’s two largest sectors, (jewellery
and investment) reached a combined total of 423 tonnes in 2009. However,
total domestic mine supply contributed only 314 tonnes during the same year.
WGC studies indicate that in the long term, gold demand is likely to continue
to accelerate, driven by investment demand in China, while current jewellery
consumption is likely to continue to grow despite higher gold prices. Gold could
also gain further momentum from central bank purchasing.
We believe that since the abolition of the ban on the private ownership of
gold investment products in China, Chinese gold demand is catching up with
Western consumption levels. This is because market liberalisation tends to have
a dramatic impact in a local market. In India, for example, its gold consumption
more than doubled from around 300 tonnes in the early 1990s to over 700
tonnes at the end of 2008 when the liberalisation process was in full swing.
WGC estimates that a substantial increase in gold demand would take place
if demand in China were to rise to Japanese, USA or Taiwanese levels. In this
case, total annual incremental demand ranges from another 1,000 tonnes at
USA and Japanese per capita consumption levels, and still more, if Chinese
consumption per capita were to rise to Taiwanese levels.
Jewellery is by far the most dominant category of Chinese gold demand,

accounting for almost 80% of all gold consumption in China in 2009. Chinese
gold jewellery off-take increased 6% year-on-year to 347.1 tonnes in 2009 and
China was the only country to experience an improvement in jewellery demand
last year. WGC estimates that current per capita consumption of gold jewellery
in China is around 0.26gm. This level is low when compared to countries with
similar gold cultures. If gold were consumed in China at the same rate per
capita as in India, Hong Kong or Saudi Arabia, annual Chinese demand could
increase by at least 100 tonnes to as much as 4,000 tonnes in the jewellery
sector alone.

China gold report
China currently ranks fourth in annual retail investment demand in the world,
behind Germany, the USA and Switzerland. Gold investment demand in China
entered a new era with the opening of the Shanghai Gold Exchange in 2002.
At the end of 2009, China’s net retail investment in gold totalled 80.5 tonnes,
up 22% year-on-year. Chinese consumers are typically high savers and gold
investment amongst private individuals in China is developing rapidly. Going
forward, we believe that Chinese gold investment demand could be supported
by higher wealth and incomes and near-term inflationary expectations. Total
gold investment demand in China has grown in line with the country’s GDP and
population since 2001 and we expect this trend to continue in future. Gold’s
lower comparative volatility and low to negative correlations with mainstream
financial asset classes make it attractive as a risk management vehicle for both
institutional and retail investors in China.
Chinese gold consumption in industrial applications has been steadily growing

over the past ten years. Nevertheless, industrial demand for gold in China has
lagged behind the Western world, but it is potentially a booming market in
the future owing to the ongoing rise of Chinese living standards and China’s
rise as the world’s manufacturing centre. Electronics continues to dominate
the domestic industrial demand landscape. Over the medium term, industrial
demand is likely to improve as global economic conditions and Chinese exports
improve. Longer term, industrial demand for gold is likely to rise following the
potential launch of gold auto catalysts to reduce carbon monoxide emissions,
and growth in mobile phone usage which is set to multiply among an expanding
Chinese middle class.
China is the sixth largest official holder of gold, after the USA, Germany, the
IMF, Italy and France. The gold reserves of the People’s Bank of China, (PBoC)
as a percentage of total reserves are low by international standards, currently
at 1.6%. WGC believes that there is ample scope for further growth as China still
has the “fire power” left in its books should the country decide to increase its
gold reserves. The country’s total foreign exchange reserve is worth US$2.4tn,
which is nearly two to 41 times the value of the G7 members’ total reserves at
the end of 2009. China is already a major investor in US Treasuries, but with
uncertainty surrounding the future direction of the US dollar and the Yuan,
the search for alternative international asset choices for the PBoC’s balance
sheet may lead to a focus on gold. WGC estimates that if the PBoC decides to
rebalance its books back, for example, to its recent peak gold holding ratio of
2.2% in Q4 2002, the incremental demand would amount to a further 400 tonnes
at the current gold price. Even adding 10% from current levels of gold holdings
would translate into incremental demand of 100 tonnes.
During the past decade, total Chinese gold mine output rose 84% and reached
a new record in 2009 of 313.98 tonnes, according to China Gold Association
(CGA)1. China is already the world’s biggest producer and second largest
consumer of gold, but has only 4% of total global gold reserves, according to
the US Geological Survey (USGS) in 2009. Assuming the USGS’ recent figures
are correct, China may exhaust existing gold mines in six years from now. This
1
Xinhua News Agency, 31 January 2010

China gold report
could occur more rapidly if demand for gold in China experienced a sudden
surge from current levels. However, China’s gold resources are still relatively
undiscovered and could create new investment opportunities. WGC also found
that the total cost of production in China has risen by more than 30% in the last
six years as a result of higher input costs (such as energy and labour) and lower
ore grades. Therefore, WGC believes that Chinese gold supply growth may be
more challenging and is likely to decline unless there is further investment in the
Chinese gold industry.
Recycled gold supply is a wildcard in China. However, we believe that Chinese

consumers are in the process of accumulating gold, which suggests that they
are less willing to sell back their holdings in response to higher gold prices.
Although it is now eight years into the gold bull market, the Chinese gold
industry is simply not responding fast enough to bring in new supply. These
effects combined create a “snowball” effect in China whereby the domestic gold
industry may not be able to catch up with the annual leap in local consumption.
Each year, China’s demand for gold continues to grow, and the gap increases
between new demand and new supply.
China has recently provided strong support for global gold demand during a
period of weakness in other parts of the world in the gold industry. In a period
of ongoing economic and financial uncertainty gold’s role as a monetary asset,
a global currency and an insurance policy providing protection against the
unknown, all make gold an attractive asset class.
Gold has performed impressively for nearly a decade, both in China and
internationally. Today, the combination of a healthy outlook for gold demand
and its relatively inelastic supply in China may be seen as perfect conditions
for gold and China is well placed to capitalise on this. In the longer term, WGC
believes that China could have a long period of strong demand ahead and the
consumption of gold in China has the potential to double in the next decade.

China gold report
Gold demand in China – a new world

of opportunity
Origins of gold demand
Gold is a symbol of wealth in Chinese culture. The children of affluent Chinese

families are said to be born not with a silver spoon as in Britain, but with a
golden chopstick in their mouths. In Chinese tradition, gold is given as a gift on
birthdays, mother’s day, births and at Chinese New Year. Gold is also bought
as part of the wedding jewellery which forms a major part of total jewellery
demand in China.
According to the author, Timothy Green2, the Chinese have long adored gold.
In 23 AD, Emperor Wang Mang who founded the Xin Dynasty held the world’s
largest reserves of gold, approximately 155 tonnes in his treasury. Although
today China is the worlds second largest gold consumer and largest global
producer, the country was a relative late-comer to the gold scene. Archaeological
discoveries in China have found early evidence of copper and bronze in northern
China around 2000 BC however the first signs of gold were discovered later,
after 1500 BC and not before 1000 BC.
Gold first played a role as a money currency in the Southern state of Zhou.
The commodity has always been measured in weight – liang in Mandarin and
tael in Cantonese indicating one Chinese ounce. However, the actual weight
of the ounce has changed. Today, one liang / tael weighs 37.43 grams/12 oz
compared to 15.25 grams/0.49 oz during the Han Dynasty era in 206 BC. Peter
J. Golas, in his study of gold mining in China, observed that gold bullion was
extensively used in commercial transactions during the Han period3.
After the collapse of the Han Dynasty, the tradition of minting gold coins did not
develop for many centuries during the reigns of the Tang, Ming, and Qing. The
currency of the time was copper, although silk was used to settle transactions4.
Gold was used among the nobility, for settlements among the different factions
in China and for hoarding wealth.
During the period of the Six Dynasties (AD 222-589), demand for gold rose
when Buddhism swept across China. The arrival of the religion from India and
Tibet influenced Chinese Buddhist worshipers to make gold offerings, to build
ornate stupas (pagodas) and to bequeath gold statues in the Buddha’s image.
According to John Kieschnick, the amount of gold used to make Buddhist
images was so overwhelming that the Chinese government dictated the melting
down of Buddhist images in order to supply the metal for construction and for
use by the military5.
2
Timothy Green, author of The Ages of Gold
3
Peter J. Golas, Science and Civilisation in China, 1999
4
Han Schu, Food and Money in Ancient China, 1950
5
John Kieschnick,The Impact of Buddhism on Chinese Material Culture, 2003

China gold report
Overview of the early gold market
Prior to 2002, the gold market in China was tightly regulated from production
through to retail distribution. Gold prices and quotas were dictated by the
People’s Bank of China (PBoC) jointly with other central authorities. Permission
was required from the PBoC to export gold and imports of gold jewellery were
subject to a 60% import tariff (albeit a 40% cut from 100% in 1996). From 1996,
China hastened the reform and liberalisation process. The freeing of the gold
market included the use of the Shenzhen special economic zone to loosen
jewellery retail price controls and to make the Yuan convertible (the Yuan is
also referred to as Renminbi or CNY). It was not until October 2002 that the
Shanghai Gold Exchange was established to replace the PBoC’s gold purchase
and allocation system. China also became a full member the World Trade
Organisation (WTO) on December 2001 and has since worked to encourage the
modernisation of mining laws in order to bring investment and mining expertise
from the West into China.
China Gold Association (CGA) was established in November 2001 and plays an
active role in China’s gold industry. CGA acts as a bridge between the Chinese
government and gold producers in protecting business interests and providing
information, consultancy, co-ordination and intermediary services for them.
The Industrial and Commercial Bank of China (ICBC) and other commercial
banks played a significant role in preparing for the launch of a fully functioning
gold market. According to China Internet Information Center (www.china.org.cn),
ICBC had actively participated in setting up the operations of the Shanghai Gold
Exchange and offered a range of services including clearing, warehousing, gold
trading, leasing, financing for gold projects, gold purchasing, gold investment
projects, gold import and export and individual gold trading.
Chart 2: Organisation structure of China gold industry
Chart 2: Organisation structure of China’s gold industry
The State Council

Cabinet
State-owned Assets
Supervision and Ministry of Land National Development People’s Bank of
Administration and Resources and Reform China (PBoC)
Commission (SASAC) (MOLAR) Commission (NDRC) Central Bank
Control State assets Licensing Authority Policy and Planning Gold supplier to, and
and investments supervisor of SGE
China National Gold Group China Gold Shanghai Gold Exchange

Corporation (CNGGC) Association (SGE)
Wholly-owned state (CGA) Membership Traders
holding company Trade organisation for Gold, Platinum
and Silver
Source: WGC and China Financial Services

10
China gold report
Recent economic trends
The Chinese economy has grown rapidly over the last decade. China’s increasing
personal income and consumption, aided by strong growth in its gross domestic
Chart 3: Gold
product (Yuan/oz)
(GDP) and China
(9.3% Real GDP
in 2007, Growth
9.0% in (%)
2008 and 8.7% in 2009) have nurtured
the development of the luxury goods industry in the country.
Chart 3: Gold (Yuan/oz) and China real GDP growth (%)
Yuan/oz YoY %
9,000 16
8,000 14
7,000
12
6,000
10
5,000
8
4,000
6
3,000
2,000 4
1,000 2
0 0
1980 1984 1988 1992 1996 2000 2004 2008 2012E
Gold (Yuan/oz) Real GDP growth (YoY%)
Chart 4: Gold (Yuan/oz) and China Nominal GDP (US$bn)

Source: IMF (World Economic Outlook Update, January 2010), the BLOOMBERG PROFESSONALTM service
Chart 4: Gold (Yuan/oz) and China nominal GDP (US$bn)
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1980 1984 1988 1992 1996 2000 2004 2008 2012E
Gold (Yuan/oz) Nominal GDP (US$bn)
Source: IMF (World Economic Outlook, October 2009), the BLOOMBERG PROFESSONALTM service
Today the country’s large balance of payments surplus, rapid economic growth,
the high saving rate and the aggressive fiscal stimulus to offset global recession,
make China a target destination of global foreign investment. China’s foreign
direct investment (FDI) in January 2010 rose 7.8% year-on-year to US$8.13bn,
marking the sixth consecutive month of year-on-year growth.
11
China gold report
Chart 5: Gold (Yuan/oz) and China FDI (US$bn)

Chart 5: Gold (Yuan/oz) and China FDI (US$bn)
Yuan/oz US$bn
9,000 14
8,000
12
7,000
10
6,000
5,000 8
4,000 6
3,000
4
2,000
2
1,000
0 0
Nov-96 Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08
China FDI (US$bn) Gold (Yuan/oz)
Source: the BLOOMBERG PROFESSONALTM service
The graphs below show the rapid recovery of the HSBC China Manufacturing
Purchasing Managers’ Index (PMI) during and after the credit crisis. The index
is a measure of manufacturing activity across China. The rapid recovery in the
index and the continued strong economic growth rate being experienced by
China has meant that the impact of the credit crisis has been relatively modest
compared with the majority of the Western world, which faced deep recession
in 2009 and is only now beginning to recover.
Chart 6 Gold (Yuan/oz) and Chinese PMI Manufacturing Index

Chart 6: Gold (Yuan/oz) and Chinese PMI manufacturing index
Yuan/oz Points
9,000 60
8,000
55
7,000
50
6,000
45
5,000
40
4,000
3,000 35
Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09
Gold (Yuan/oz, LHS) PMI manufacturing index (points, RHS)

12
China gold report
Chart 7: Gold (Yuan/oz) and China PMI New Orders
Chart 7: Gold (Yuan/oz) and China PMI new orders
Yuan/oz Points
9,000 70
65
8,000
60
7,000
55
6,000 50
45
5,000
40
4,000
35
3,000 30
Gold (Yuan/oz) China new orders PMI (points)
China now represents more than 20% of the major mining companies’ sales of
metals and 30-50% of the global raw materials demand.
Since the credit crisis began, China has been adjusting its economic model
away from reliance on exports and Western consumers, and towards more
domestically driven demand – a market with over 1.3bn consumers. In order
to achieve this, China has been aggressively embarking on fiscal spending to
secure the supply of raw materials and to facilitate the country’s industrialisation
and urbanisation programmes.
This includes a strategic purchasing policy (i.e. restocking), implemented

through the Strategic Bureau Reserve Agency, resulting in the purchase of
commodities such as grains, copper, nickel and aluminium.
China’s restocking strategy has also taken the form of acquisitions of natural
resource producers around the globe.
13
China gold report
Table 8: List of selected Chinese natural resource acquisitions announced

Year Acquiror Target/Comments Country Commodity Value
(US$mn)
2009 Minmetals 100% stake in OZ Minerals, the world’s Australia Zinc 1,700
second largest zinc miner
2009 Shenzhen Zhongin 50.1% stake in Perilya Ltd Australia Zinc and lead 29
Lingnan Nonfermet
2009 China Non-Ferrous Terramin Australia’s lead and zinc supplies in Australia Lead and zinc 32
Metals Industry Algeria
2009 Jilin Ji En Nickel Industry Bought 51% of Ontario’s Liberty Mines, a Canada Nickel 24
Co. nickel producer
2009 Hunan Valin Iron & Steel 16% stake in Fortescue Metals Australia Iron ore 770
2008 Chinalco Bought 9% stake in Rio Tinto Group U.K. Diversified 14,000
2008 Wuhan Iron & Steel 50% stake in Centrex Metals Ltd, five iron ore Australia Iron ore 127
projects
2008 Western Mining Co Ltd. 10% stake in FerrAus Ltd. Australia Iron ore 16
2008 Jinchuan Group Ltd. 100% stake in Tyler Resources Canada Copper 214
2008 Shougang Corporation 19.9% interest in Prosperity Resources Ltd. Australia Iron ore 4
2008 Haoning Group 9.55% stake in Jupiter Mines Ltd. Australia Iron ore 4
2008 Aluminium Corporation 40% stake in Saudi Aluminium project Saudi Arabia Aluminium N/a
of China Ltd. (CHALCO)
2008 Hunan Nonferrous 87.8% stake in Abra Mining Ltd. Australia Base metals 111
Metals Corporation. Ltd
2008 Citic Resources 20.39% stake in Macarthur Coal Ltd. Australia Coal 17
Holdings Ltd.
2008 Hunan Valin Steel Tube 11.39% stake in Golden West Resources Ltd. Australia Iron ore 27
& Wire Co.
2008 Sinosteel Corporation 98.52% stake in Midwest Australia Iron ore 1,300
2008 Zhaojin Mining Controlling stake in a gold mine in Hebei China Gold 49
province
2008 China National Gold Bought Canadian listed gold producer, Canada Gold 206
Group Jinshan Gold
2007 Sinosteel Corporation 67% stake in Zimasco Holdings Zimbabwe Ferrochrome N/a
2007 Zijin Mining 20% interest in a gold project from Lepanto Philippines Gold 55
Consolidated Mining Co.
2007 Chinalco Peru Copper Inc. Peru Copper 860
2007 Anshan Iron & Steel Australian iron ore joint venture with Australia Iron ore 1,600
Group Gindalbie Metals Ltd.
2006 China National Overseas 45% stake in the licence covering the OML Nigeria Oil 2,700
Oil Corporation. 130 Nigerian oil fields
Source: the BLOOMBERG PROFESSONAL™ service, Reuters, China Mining, Metal Bulletin, Wall Street Journal,
Chinalco = Aluminum Corporation of China Limited
We believe this to be a long term strategy of China – to invest its wealth, to

stimulate industrialisation and urbanisation, and to secure supplies and
production of key raw materials.
In 2009, governments and central banks around the world implemented various
liquidity strategies (such as interest rate cuts, fiscal stimulus, and quantitative
easing) as a panacea to the global crisis. The table below shows the fiscal
stimulus from selected countries, amounting to over US$1.7tn. This was in
addition to various bailouts, the Obama plan and the Troubled Asset Relief
Program plan (TARP), which together totalled over US$20-30tn on a global
basis.
14
China gold report
Table 9: Fiscal stimulus announcements in 2008
Selected country US$bn Comments

USA 825 Over US$200bn on infrastructure program.
China 586 Chinese stimulus package worth around 13% of GDP. Almost two-thirds of
this package in infrastructure spending (railways, airports, power grid and
for reconstruction.
Europe 193 Includes the following spending on infrastructure: @18bn in Germany, @8bn
in Spain, @4bn in France, @17bn in Italy and SEK1bn in Sweden.
Japan 73 In April 2009, Reuters reported that the cumulative size of the Japanese
stimulus package approached US$154bn (or 3.1% of 2008 GDP).
Mexico 32 Stimulus package amount to 1% of GDP and includes a US$14bn
spending on infrastructure.
Russia 20 According to United Nation’s Economic and Social Commissions for Asia
and the Pacific, total fiscal stimulus announced in Aril 2009 amount to RUB
3tn (US$90bn) or 7.2% of 2008 GDP.
Argentina 16 Almost two-thirds of this package allocated to road infrastructure projects
and social improvements.
Singapore 14 Stimulus package totalling SGD20.5bn (US$14bn) and includes a
US$2.9bn infrastructure spending.
Australia 7 Infrastructure program includes road funding, construction projects and a
A$1.2bn railway construction by the Australian Rail Track Corporation.
India 4 Stimulus package amount to 200bn Indian Rupees (US$4bn) or 0.4% of
2008 GDP.
Source: the BLOOMBERG PROFESSONALTM service, Financial Times, News run, United Nation’s Economic
and Social Commissions for Asia and the Pacific, Reuters
China announced a fiscal stimulus measure of approximately US$586bn (or 4tn

Yuan) to improve its rail, road and air transport links. This measure also created
new demand for raw materials during 2009.
At the end of February 2010, the growth of China’s M2, the broad measurement
of money supply, jumped 26% year-on-year on the back of strong fixed asset
investments and related lending growth especially from big state-owned banks
to add credit support to infrastructure projects.
Chart 10: Gold (Yuan/oz) and Money supply M2 (Yuan bn) in China
Chart 10: Gold (Yuan/oz) and Money supply M2 (Yuan bn) in China
Yuan/oz Yuan bn
9,000 65,000
60,000
8,000
55,000
7,000 50,000
45,000
6,000
40,000
5,000 35,000
30,000
4,000
25,000
3,000 20,000
Gold (Yuan/oz) Money supply M2 (Yuan bn)
Source: the BLOOMBERG PROFESSONALTM service, PBoC

15
China gold report
We believe that a majority of the economies around the world still face strong
headwinds as a result of the credit crunch. This includes huge deficits which
signal currency uncertainty, sluggish economic growth, elevated unemployment
in the near future, downward pressure on asset values and inflationary risks.
Clearly, the global banking sector is not out of danger and the availability
of credit remains constrained, with some banks still on life support. Some
commercial banks remain unwilling to lend, forcing bond and rights issues by
companies around the globe.
Public debt levels in the USA and Eurozone are recognised by most commentators
as unsustainable. According to the IMF and the European Commission, the
general government debt as a percentage of GDP in the Eurozone will rise from
69.3% in 2008 to 79.3% in 2009, 85.4% in 2010 and 90.7% in 2011.
The continued problems in the banking sector around the world suggest that
the credit multiplier is not functioning. The IMF reported a total realised loss of
approximately US$1.2tn by banks and expects additional write downs or loss
provisions of US$1.6tn, suggesting that banks are unlikely to expand credit in
the near-term. Whilst continued expansion in China has moderated the impact
of the credit crunch globally, the prospect of significant overheating of the
Chinese real estate and stock markets are also raising considerable concerns.
The table below shows IMF estimates of the global bank loans and securities
holdings and total write-downs between 2007 and 20106. According to the
IMF, Asia banks have less exposure in loans and securities (14% of global or
US$7.9tn) and future write-down risks (7% of global estimated total write downs,
US$186bn).
Table 11: Estimated Global Bank write-downs (2007-2010E)
Domicile Est. holdings of loans Breakdown Est. total write-downs Breakdown

and securities US$bn % (US$bn) %
USA 12,561 23% 1,025 36%
United Kingdom 8,369 15% 604 22%
Euro Area Banks 26,871 48% 1,015 36%
Asia Banks 7,879 14% 186 7%
Total 55,680 100% 2,809 100%
Source: IMF (Global Financial Stability Review, October 2009)
6
The International Monetary Fund, Global Financial Stability Review, October 2009.
16
China gold report
Chart 12: China's share of global gold demand (%)
Demand continues to strengthen in China
Chart 12: China’s share of global gold demand (%)
Tonnes % of global
5,000 12
10
4,000
8
3,000
2,000
4
1,000
2
0 0
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Global gold demand (tonnes) China's share (% of global)
Note: China gold consumption figure excludes PBoC purchasing.

Source: GFMS, WGC estimates
Today, China’s gold market is enjoying the benefits of liberalisation and

deregulation. Gold consumption in China has been on the rise due to the
country’s rapid economic growth and the continued improvements in living
standards of its population.
Chinese demand for gold has grown at an average rate of 13% per annum over
the past five years. This makes it the world’s second-largest gold consumer after
India, as the booming economy spurs jewellery purchases which constitute the
majority of total Chinese gold demand.
Chart 13: China gold demand by application (2009)
Chart 13: China gold demand by application (2009)
Industrial Investment
4% 18%
Jewellery
consumption
78%

17
China gold report
The graph shows the intensity of gold consumption in selected countries. This is
measured by looking at each country’s gold demand per capita versus its gross
domestic product (GDP) per capita in 2009. We find that China – together with
some developing countries such as Russia, India and Indonesia – has a lower gold
consumption intensity
Chart 14: Global compared
gold consumption to Western economies like the USA and Italy.
intensity
Chart 14: Global gold consumption intensity
Per capita
gold consumption (gm)
1.6
1.4 Taiwan
South Korea
1.2
USA
Japan
1.0
0.8 Italy
0.6
Russia United Kingdom
India
0.4
China
0.2
Indonesia
Thailand
0.0
0 5 10 15 20 25 30 35 40 45 50
GDP per capita (US$’000)
Note: Demand excludes central bank purchases.

Source: GFMS, IMF, WGC estimates
The level of China’s consumption per capita has been increasing as a result of
the deregulation of the gold market. Higher incomes per head and the underlying
strength
Chart 15: Chinese of gold
gold jewellery culture
demand indemand
(t) and Chinaperhave
capitabeen
(gm) major supporting factors. We note
that China’s consumption per capita rose from 0.17gm in 2002 to 0.33gm in 2009;
while over the same period average annual gold prices in US dollars have risen by
216% to US$1,099 an ounce and the population increased by around 50mn.
Chart 15: Chinese gold demand (t) and demand per capita (gm)
Gold demand
Tonnes per capita (gm)
500 0.35
0.30
400
0.25
300 0.20
0.15
200
0.10
100
0.05
0 0.00
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
China* (tonnes) Demand per capita (gm)
Note: *Figures exclude the PBoC gold purchasing.

18
China gold report
Chart 16: Relative performance of gold price in selected currencies (Jan 2005 = 100)
Chart 16: Relative performance of gold price in selected currencies (Jan 2005 = 100)
Index Jan 2005 = 100

300
280
260
240
220
200
180
160
140
120
100
80
Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10
Yuan US$ Indian Rupee Euro Yen
Source: the BLOOMBERG PROFESSONALTM service, WGC
The graph above displays relative gold price movements in selected currencies
(Yuan, Euro, Indian Rupee and Japanese Yen) since January 2005. It illustrates
the relative strength of the Chinese Yuan, the Euro and the Yen when compared
to Chart
the US17: Gold (US$/oz)
dollar andand USIndian
the dollar-Yuan exchange rate (USDCNY)
Rupee.
Chart 17: Gold (US$/oz) and US dollar-Yuan exchange rate (USDCNY)
US$/oz USDCNY rate

1,200 9.0
1,100
8.5
1,000
8.0
900
800 7.5
700
7.0
600
6.5
500
400 6.0
Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10
Gold (US$/oz) USDCNY
Note: Chinese Yuan also referred to as Renminbi or CNY in this report.

US dollar weakness and Yuan strength over the last two years have helped to
support domestic gold demand in China. The uncertainty over the US dollar
could remain in the near term until we see confidence return in the USA economy
and an increase in rates by the US Federal Reserves.
19
China gold report
Chart 18: Relationship between gold (Yuan/ oz) and US $/Yuan exchange rate
Chart 18: Relationship between gold (Yuan/oz) and US$/Yuan exchange rate
Gold
(Yuan/oz)
8,000
7,000
y = -1798.2x + 18818
R2 = 0.78987
6,000
5,000
4,000
3,000
6.5 7.0 7.5 8.0 8.5
USDCNY rate
Source: the BLOOMBERG PROFESSONALTM service, WGC estimates
We believe that rising average incomes, a surplus of investable income derived

from a high savings rate and improving standards of living in China are factors
which will help fuel growth in gold demand, especially the growth of discretionary
spending in the jewellery sector.
Chart 19: Gold demand and Average Wage Index of Staff and Workers (YoY%) in China)
Chart 19: Gold demand and average wage index of staff and workers (YoY %) in China
Gold demand (YoY%) Average wage index

120 40
100 35
80 30
60 25
40 20
20 15
0 10
-20 5
-40 0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2002
2003
2004
2005
2006
2007
2008
Gold demand (YoY%) Average wage index of staff and workers index*
Note: * Average Wage Index of staff and workers data available until 2008 only
China’s gold demand excludes the PBoC gold purchasing.
Source: the BLOOMBERG PROFESSONAL service, GFMS, WGC estimates
20
China gold report
Chart 20: Relationship between total gold demand in China and gold (Yuan/oz)
Chart 20: Relationship between total gold demand in China and gold (Yuan/oz)
Gold demand
in China (tonnes)
500
400
300
200
100
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
Gold (Yuan/oz)
Note: Figures exclude the PBoC gold purchasing.

Estimates are based on the selected countries’ gold demand per capita.
The graph below illustrates the WGC’s projection of incremental gold demand
in China at other selected countries’ per capita consumption rates. We estimate
that a substantial increase in gold demand would take place if demand in China
was raised to Japanese, USA or Taiwanese levels. In this case, total incremental
demand ranges from another 1,000 tonnes at USA and Japanese per capita
consumption levels to still more, if Chinese per capita gold consumption were
to rise to Taiwanese levels.
Chart 21: Incremental Chinese gold demand at selected countries’ per capita gold consumption
Chart 21: Incremental Chinese gold demand at selected countries’ per capita gold consumption
Gold demand
(tonnes)
2,000
1,500
1,000
500
0
China India UK Japan USA Taiwan
Cumulative incremental demand* (tonne)
Note: *Estimates based on IMF’s 2010E China population figure.

China’s gold demand excludes the PBoC gold purchasing.
21
China gold report
China’s market share of demand for gold and

China's market share of demand on selected commodities (% of global)
selected commodities
Chart 22: China’s market share of demand for gold and selected commodities (% of global)
% of global
60
50
40
30
20
10
0
Gold Platinum Oil Aluminium Nickel Tin Copper Zinc Lead
2002 2008 2009
Source: the BLOOMBERG PROFESSONALTM service, GFMS, World Bureau Metal Statistics, Johnson Matthey,
EIA, BP, China Coal, WGC estimates
China’s share of global gold demand doubled from 5% in 2002 to 11% in 2009.
This should not be a surprise given that the Chinese gold market was liberalised
less than a decade ago. The growth of China’s share of global demand in
other metals has been even more marked. China’s share of aluminium, nickel,
copper, tin, zinc and lead global consumption has grown to over 30% each.
This was mainly due to the country’s strategic purchasing (i.e. restocking)
through the Strategic Bureau Reserve Agency in order to facilitate the country’s
industrialisation and urbanisation programmes.
The exception is oil. China’s share of total oil consumption rose from 7% in 2002
to 10% in 2009. According to BP and the United States’ Energy Information
Administration (EIA), the reason for the slow growth in oil consumption is that
China has limited reserves of oil and natural gas but substantial reserves
of coal7. China has an abundance of coal resources and coal remains the
leading source of energy for China’s industrial sector. China’s State Energy
Administration said at the Ningxia Energy Development Strategy Forum in June
2009 that the country has made progress on the construction of large coal
mines, which can satisfy the power requirements of the rapidly growing crude
steel production industry in China. Wu Yin, the Administration’s Chief Engineer,
stated that the country now has 35 large coalmines each with an annual output
of over 10mn tonnes and 14,000 small coal mines with an average production
capacity of 180,000 tonnes per annum.
7
BP Statistical Review of World Energy, June 2009 Report
22
China gold report
Gold price and seasonality
Gold is currently trading around US$1,100/oz, a 57% rise from its low of around
US$700/oz in November 2008. The metal has continued to shine for the past
eight years – providing an average return of 18% per annum whilst remaining
relatively insulated from the forces that have dragged down other asset classes
during the credit crisis and recession.
Chart 23: Performance of gold prices in US$ and Yuan per oz
Chart 23: Performance of gold prices in US$ and Yuan/oz
Yuan/oz US$/oz
9,000 1,200
8,000
1,000
7,000
6,000 800
5,000
600
4,000
3,000 400
2,000
200
1,000
0 0
Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08
Yuan US$
Seasonally, January, September and November have been the strongest months
for gold in the last five to ten years. In China, consumers typically restock during
the winter months for Chinese New Year, Christmas and New Year, which has
a positive impact on Yuan gold prices. There is no perfect rule of thumb to
seasonality but gold bulls will be encouraged to know the China gold market is
entering the traditional second restocking wave of the year in April and May.
Chart 24: The average monthly gold performance in Yuan/ oz ending December 2009
Chart 24: The average monthly gold performance in Yuan/oz ending December 2009 (MoM%)
MoM%
8
-2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
10Y average 5Y average

23
China gold report
Jewellery – potential demand growth given current low per

capita level
China’s gold jewellery market is unique; local consumers are well aware of
gold’s benefit as a store of value.
Gold jewellery (especially 24 carat gold jewellery which accounts for at least
80% of total gold jewellery demand in China) has always been regarded as
an investment by the Chinese. The majority of the Chinese jewellery market
is 24 carat gold, sold as “chuk kam” (which means “pure gold” in Mandarin,
technically 100% purity – or as near as can be produced).
However, in recent years, the WGC has seen a shift of demand into 18 carat
jewellery (75% gold content, alloyed with copper and other metals). Innovative
products such as K-gold, 18 carat gold with Italian inspired design, launched
in 2003 by the WGC and its partners, has been a success in attracting younger,
urban cosmopolitan consumers to gold jewellery.
WGC also introduced the Gold Elite Product with “per-piece-pricing strategy”
through the launch of an Only Gold Elite Product Campaign in 2007, establishing
an elite product category among 24 carat pure gold market.
Chart 25: China gold demand by sector (%)

Chart 25 Updated 22-3: China gold demand by sector (%)
% of total
100
80
60
40
20
0
1989 1992 1995 1998 2001 2004 2007
Investment Jewellery Industrial
Note: Jewellery data in this chart refers to consumption not fabrication.

Source: GFSM, WGC estimates
Jewellery is by far the most dominant area of China’s gold demand, absorbing
almost 80% of tonnage off-take in China for the past ten years.
24
China gold report
During the same period, China’s jewellery off-take has averaged 250 tonnes of
gold per annum. In 2009, the country ranked second in the global gold jewellery
market, behind India.
Chart 26: Top gold jewellery consumers by country in 2009
Chart 26: Top gold jewellery consumers by country in 2009
% of total world gold jewellery demand

25
20
15
10
0
India
China
USA
S. Arabia
Turkey
UAE
Egypt
Russia
Indonesia
Italy
Japan
South Korea
Vietnam
UK
Note: Jewellery data in this chart refers to consumption not fabrication. Hong Kong
In 2009, the country proved to be the most resilient of the global gold jewellery
markets, as shown in the chart below. China posted a noticeable growth in
contrast to declining gold jewellery demand elsewhere. Gold jewellery demand
in China was up 6% year-on-year to reach 347.1 tonnes in 2009, representing
around 20% of world gold jewellery demand.
Chart 27: Movement in gold jewellery consumption by country (2009)

Chart 27: Movement in gold jewellery consumption by country (YoY %) in 2009
YoY%
10
0
China
Hong Kong
Japan
India
South Korea
Italy
World
USA
Taiwan
Vietnam
Egypt
Saudi Arabia
Indonesia
Middle East
UAE
Russia
Turkey
Thailand
UK
Other Gulf
-10
-20
-30
-40
-50
-60

25
China gold report
The figures show gold jewellery consumption per capita for selected countries
around the world. Large variations can be observed in gold jewellery demand
across the selected countries studied.
Chart 28: Gold jewellery consumption per capita for selected countries in 2009 (gm /capita)
Chart 28: Gold jewellery consumption per capita for selected countries in 2009 (gm/capita)
gm/capita
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Thailand
Vietnam
Indonesia
Japan
China
India
Russia
Taiwan
USA
Italy
Egypt
Turkey
Saudi Arabia
UK
South Korea
Hong Kong
Gold jewellery consumption per capita
Note: Jewellery
Chart data in this
29: Gold jewellery chart refers
consumption to capita
per consumption not fabrication.
for selected countries in Middle East and China (gm /capita, 2009)
Chart 29: Gold jewellery consumption per capita for selected countries in the Middle East and
China (gm /capita, 2009)
gm/capita
14
12
10
0
China Egypt Turkey Saudi Arabia UAE
Gold jewellery consumption per capita

The three largest per capita gold consumers in the world, United Arab Emirates
(UAE), Saudi Arabia and Hong Kong, are also jewellery producers with strong
gold cultures.
We believe there is significant potential for gold jewellery demand in China to

increase. We estimate that current Chinese jewellery consumption is around
26
China gold report
0.26 gm per capita. This level may seem low for a culture with strong affinity
to gold, when compared to other countries such as UAE, Saudi Arabia, Hong
Kong, India and Taiwan. These countries and regions have similar magnetism
to gold however the jewellery per capita consumption in 2009 was estimated to
be 1.3 to 53 times that of China’s. In tonnage terms, WGC estimates that if gold
was consumed in China at the same rate per capita as in India, Hong Kong or
Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to
as much as 4,000 tonnes in the jewellery sector alone.
Chart 30: Gold jewellery consumption per capita for selected countries/ China per capita (x times)
Chart 30: Gold jewellery consumption per capita for selected countries/China per capita
(x times)
UAE
Saudi Arabia
Hong Kong
Turkey
Egypt
Italy
UK
USA
Taiwan
S. Korea
Russia
India
0 10 20 30 40 50 60
x times
Gold jewellery consumption per capita/China per capita (x times)

Source: GFMS,
ChartIMF,
31: WGC estimates
Incremental gold jewellery demand to China at selected countries' per capita gold jewellery consumption
Chart 31: Incremental Chinese gold jewellery demand at selected countries’ per capita gold
jewellery consumption
Gold jewellery
demand(tonnes)
5,000
4,000
3,000
2,000
1,000
0
China India Taiwan USA Italy Hong Saudi
Kong Arabia
Cumulative incremental demand* (tonne)
Note: *Estimates based on IMF’s 2010E China population figure. Jewellery data in this chart refers to
consumption not fabrication.
27
China gold report
There are some caveats to this assertion. It is not always possible to arrive at an
accurate forecast using the per capita assumption due to the following factors:
the strength of gold culture, income level per head of individual country and
government intervention
Chart 32: (i.e.,and
Population (million) the prohibition
gold of private
jewellery demand per capitaownership).
(gm) in China
Chart 32: Population (mn) and gold jewellery demand per capita (gm) in China
Gold jewellery
mn demand (gm)
1,400 0.40
1,300 0.30
1,200 0.20
1,100 0.10
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Population (mn) Demand per capita (gm)
Note: Estimates based on IMF’s China population figure, 2010-2014 population figures are IMF’s projection.
Jewellery data in this chart refers to consumption not fabrication.
We believe that as Chinese incomes and population rise, so will the demand for
gold. The cultural affinity towards gold is very strong in China, as in India. The
main difference is that China has a lot of catching up to do and there is no sign
of a slowdown in China’s appetite for gold.
Investment – an opportunity to play catch up?
China’s gold investment entered a new phase following the deregulation of its
gold market in 2001 and the opening of the Shanghai Gold Exchange (SGE) in
2002. Today China is the fastest growing major economy in the world, having
maintained an average 9.8% real GDP growth throughout the last decade. The
country has gradually opened up to foreign markets and investment but has
nevertheless lagged behind the Western world where there are fewer regulatory
and other barriers to international capital movements.
During China’s Eleventh Five-Year Plan period (2006-2010), gold investment

among private individuals in China has been developing rapidly as Chinese
investors catch up with their foreign counterparts in terms of gold ownership.
We believe there is a growing interest among the Chinese in commodity

investment, stimulated by a high savings ratio, but also because there are
not enough domestic investment opportunities available to Chinese investors.
Chinese consumers are high savers, having accumulated wealth since 1978
when the Chinese government shifted the burden of retirement income to
28
China gold report
individual households. The Asian currency crisis added additional impetus to

this savings culture.
One should not forget that less than nine years ago there were regulatory
restrictions on gold trading, ownership and investment in China. In 2001, the
Chinese central bank announced the abolition of China’s long-term government
monopoly of gold. Over the last century, the deregulatory tide in economic
governance has helped to reduce the number of barriers to gold ownership
around the world. In some cases the results have been spectacular. For example
during the 1990s in India, when the liberalisation process was in full swing,
Indian gold demand more than doubled from around 300-350 tonnes in 1992-
93, to over 700 tonnes at the end of 2008.
Chinese net retail investment in gold has increased from 65.9 tonnes in 2008 to
80.5 tonnes in 2009 (up 22% year-on-year). We expect this level to rise further
despite recent gold price performance. In the WGC’s Gold Demand Trends
Report for the fourth quarter and full year 20098, we highlighted that Chinese
consumers continue to buy gold in a rising gold price environment.
Chart 33: Gold (Yuan/oz) and gold net retail investment demand in China (t)
Chart 33: Gold (Yuan/oz) and gold net retail investment demand in China (t)
Gold net retail

investment (tonnes) Gold (Yuan/oz)
90 8,000
80
7,000
70
6,000
60
50 5,000
40 4,000
30
3,000
20
2,000
10
0 1,000
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Investment demand (t) Gold (Yuan/oz)
Investment in China in the form of gold coins and bar hoarding has shown a
strong growth momentum in recent years, although this market still accounted
for less than a third of total domestic gold demand in 2009.
8
WGC, Gold Demand Trends, Q409 and Full year 2009, February 2010
29
China gold report
Chart 34: Jewellery and investment demand (% of total gold demand in China)
Chart 34: Jewellery and investment demand (% of total gold demand in China)
Chinese gold demand (%)

100
90
80
70
60
50
40
30
20
10
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Jewellery demand Investment demand
We believe that the amount of Chinese gold coins and bar hoarding holdings
in private hands is much less than in countries such as India and Vietnam.
Chinese consumers are currently in the process of accumulating them, which
may suggest that they are less willing to sell back their holdings as the gold
price rises, compared to consumers in other parts of the world.
Chart 35: Net retail investment in gold by country (t)

Chart 35: Net retail investment in gold by country (t)
Tonnes
1,000
800
600
400
200
-200
1992 1994 1996 1998 2000 2002 2004 2006 2008
Germany USA Switzerland China India
Vietnam Turkey Saudi Arabia Rest of the world
At the end of 2009, China ranked fourth in annual world gold coins and bar
hoarding purchasing behind Germany, USA and Switzerland.
30
China gold report
Chart 36: Top annual gold invesment by country in 2009
Chart 36: Top gold invesment by country in 2009
% of global gold
Tonnes investment demand
160 25
20
120
15
80
10
40
5
0 0
Germany
USA
Switzerland
China
India
Vietnam
Turkey
Saudi Arabia
Taiwan
UAE
tonnes % of global gold investment
In China, there are two well known minted coins: The Chinese Panda Gold Coin,
first minted in 1982 and the Chinese Mint 2008 Olympic Coin. These coins are
of fine quality, well presented and designed mainly for collectors. The majority
of available Chinese gold coins are listed on the WGC website. Both China Gold
Coin Corporation and the Chinese Mint, operating under the direct leadership
of PBoC, deal in gold and silver commemorative coins. The PBoC has sold
over 2mn oz of gold coins to the domestic and international market since its
establishment in 1987. Shenzhen Guobao Mint was set up to specialise in the
production of gold and silver coins.
Chinese minted coins

Source: WGC
In 2006 the first gold investment bar was introduced into the market by Zhongjin,
Gold Corporation and WGC with two-way trading and a low premium over the
spot price at SGE, prompting the start of the gold investment bar markets in
China. Since then, in the absence of a Chinese listed gold exchange traded fund
(ETF), other domestic commercial banks have ventured into the gold trading
business, selling gold to individuals by offering gold accounts and physical
gold products.
31
China gold report
In January 2008, China introduced its first gold futures contract, launched on
the Shanghai Futures Exchange in respond to rising domestic demand for
gold and growing demand from producers seeking to hedge gold price risk9.
SGE introduced the special gold investment bar product – “SGE Traded Gold”
which could be traded through the gold accounts at specific commercial banks
and traded on the SGE’s trading platform. According to the CGA, volumes of
gold traded on the SGE amounted to 4,705.9 tonnes (1.03tn Yuan) by the end
of 2009, up 420% from 2005 when 905 tonnes was traded10. Nearly 6.81mn
gold futures worth approximately 1.53tn Yuan were traded on the SGE in 2009.
Many Chinese gold producers now conduct spot transactions on the exchange
instead of selling all of their gold to PBoC, the Chinese central bank prior to
establishment of the SGE in 2002. These newly introduced gold investment
products provide the opportunity for local investors to buy and own gold at a
lower cost.
Chart 37: Performance of gold and theShanghai Gold Exchange Au9999 Gold Index (Yuan)
Chart 37: Performance of gold and the Shanghai Gold Exchange Au9999 Gold Index (Yuan)
SGE Au9999
Gold (Yuan/oz) Gold Index (Yuan)
8,500 300
7,500 260
6,500 220
5,500 180
4,500 140
3,500 100
2,500 60
Oct/02
Jan/03
May/03
Aug/03
Nov/03
Feb/04
May/04
Aug/04
Nov/04
Feb/05
May/05
Aug/05
Nov/05
Feb/06
May/06
Aug/06
Nov/06
Feb/07
May/07
Aug/07
Nov/07
Feb/08
May/08
Aug/08
Nov/08
Feb/09
May/09
Aug/09
Nov/09
Feb/10
Gold (Yuan/oz) SGE Au9999 Gold Index (Yuan)
Source: the BLOOMBERG PROFESSONAL™ service, WGC
During the last decade, there has been a shift in the direction of global investment
flows. Asia has built up large trade and foreign exchange surpluses with the
Western world and China is increasingly becoming the target destination of
global foreign investment. The ongoing growth and expansion of the Chinese
economy has resulted in an abundance of investment opportunities. Currently,
a number of new investment funds have been launched in Western markets to
take advantage of the rise of China.
As China becomes more integrated within the global economy, a growing

number of foreign and domestic companies are looking for opportunities to
expand their business into and out of China. For example, the Shanghai
9
Shanghai Daily, 2 January 2008
10
32
China gold report
registration rules for foreign investors entering joint ventures (JVs) were recently
simplified to facilitate the development of foreign private equity (PE) firms in
China. Foreign companies applying to form JVs in non-restricted industries can
now apply directly to local authorities for approval instead of the Ministry of
Commerce, significantly speeding up and simplifying the process. In March
2010, Carlyle Group and Fosun Group received their PE JV license to launch a
US$100mn renminbi-denominated PE fund and became the first to be registered
in Shanghai11. Overseas firms may also be interested in obtaining a listing on
Shanghai’s international board which will launch in 2010.
China Investment Corporation (CIC), a sovereign wealth fund incorporated

in Hong Kong, announced in October 2009 a move into commodities and
real estate. CIC has disclosed that it owned equity stakes worth a combined
US$9.63bn in more than 60 USA-listed companies at the end of 2009, including
an investment valued at around US$3.54bn in Canadian miner Teck Resources.
The Wall Street Journal reported that approximately a quarter of the US$9.63bn
total is in exchange-traded funds (ETF), including gold ETFs12. According to
US Securities and Exchange Commission filings in February 2010, CIC took a
1.45mn-share stake worth US$155.6mn holdings in the SPDR Gold Trust Shares,
the biggest gold ETF backed by allocated physical gold.
We believe that the recent financial crisis has increased caution in Asia and
made Asian investors aware of the need for a hedge against the possibility of
further weakening in the US dollar to which they are heavily exposed. Gold’s
dollar hedging properties make it appropriate for this purpose.
Gold as an asset class

Using five year data on gold and other assets, we find that gold has a low to
negative correlation with mainstream financial assets. This makes gold an ideal
addition to a portfolio when it comes to managing portfolio risk, as the analysis
suggests that while core macroeconomic variables are the critical determinant
of financial index performance, they have no impact on the real price of gold.
11
China Economic Review, 4 March 2010
12
China Economic Review and The Wall Street Journal, 9 February 2010
33
China gold report
Chart 38: Historical correlation of daily returns, 5 year ending December 2009
Chart 38: Historical correlation of daily returns, 5 year ending December 2009
USDEUR
S&P 500
NIKKEI 225
Dow Jones
MSCI World
FTSE 100
DJ AIG Comdty Index
FTSE ALL
CRY Index
Aluminium
HANG SENG
S&P GSCI
Copper
Oil
SHANGHAI COMP
Platinum
SHENZHEN COMP
CRB Index
Silver
Gold
-1.0 -0.6 -0.2 0.2 0.6 1.0
Source: the BLOOMBERG PROFESSONAL™ service, WGC estimates
The real value of gold for investors also lies in its relatively low volatility. Although
gold’s volatility has increased over the last two years, it has remained significantly
less volatile than other commodities and less volatile than other major equity
indices. The following charts show that gold is not particularly volatile over the
5-year period ending December 2009.
Chart 39: Gold and selected indices. Volatility of daily returns, 5 year ending December 2009
Chart 39: Gold and selected indices. Volatility of daily returns, 5 year ending December 2009
5-year historical volatility of daily returns

50%
40%
30%
20%
10%
0%
CBOE Gold
XAU Index
S&P500 Gold
FTSE Gold
Shenzhen A
Shenzhen Comp
Shenzhen B
Shanghai Comp
Hang Seng
S&P GSCI
Nikkei 225
CAC 40
S&P 500
FTSE 100
Dow Jones
Gold
FTSE All-Share
DJ AIG Comdty Index
SWISS
MSCI World
MCX Gold Index
CRB Index
Gold and selected indices

34
China gold report
Chart 40: Gold and selected comodities. Volatility, 5 year ending December 2009
Chart 40: Gold and selected commodities. Volatility, 5 year ending December 2009

50
40
30
20
10
0
Nickel
Lead
Oil
Zinc
Copper
Silver
Tin
Palladium
Steel
Aluminium
Platinum
Gold
Gold and selected commodities
The credit crisis has triggered fresh investment demand for gold as a store of
value, similar to the caution which was experienced during the SARS crisis.
Capital preservation buying has spurred greater demand but this should not be
regarded as simply speculative or purely return driven. Evidence suggests that
it is more strategic; rooted in gold’s diversification qualities, its ability to hedge
against macro economic factors and currency fluctuations.
Gold – oil price ratio

Historically, gold tracks the performance of oil price. During the credit crisis
however, when most commodity prices fell in tandem with oil, which dropped
56%, gold did not respond the same way. This lack of correlation is clearly
illustrated in the graph below.
Chart
Chart41:
41:Gold
Gold (US$/oz) andcrude
(US$/oz) and crude
oil oil (US$/barrel)
(US$/barrel)
Gold (US$/oz) Crude oil (US$/barrel)
1,200 160
140
1,000
120
100
800
80
600 60
40
400
20
200 0
Jan/87 Jan/90 Jan/93 Jan/96 Jan/99 Jan/02 Jan/05 Jan/08
Gold (US$/oz) Crude oil (US$/bbl)

35
China gold report
The average gold to oil-price ratio since 1987 is around 15.9x but gold has
reacted to volatility in the oil price. The current gold to oil price ratio of 14.0
implies a gold price of US$1,266/oz, assuming an oil-gold ratio of 0.1 oz/barrel
and spot oil price of US$80/barrel.
Chart
Chart 42:42: Gold
Gold - oil–ratio
oil ratio
(x)
Gold/oil ratio
40
30
20
10
0
Jan/87 Jan/90 Jan/93 Jan/96 Jan/99 Jan/02 Jan/05 Jan/08
Gold/oil ratio
The graph below displays the relationship between the oil and gold prices in
US dollar terms since 1987. The correlation between the oil and gold price
implies that, for each US$1/bbl rise in the oil price, the gold price will increase
by around US$65/oz.
Chart 43: Relationship between gold and oil price
Chart 43: Relationship between gold and oil price
Oil (US$/bbl)
160
140
120
y = 0.1007x - 11.05
R2 = 0.654
100
80
60
40
20
0
200 400 600 800 1,000 1,200
Gold (US$/oz)

36
China gold report
Gold – inflation
The graph below shows the nominal and real price of gold in US dollars since
1968. Gold has proved itself as an effective hedge against inflation and has
maintained its purchasing power over the period.
Chart 44: Gold Price - Nominal and Real (1968 = 100)
Chart 44: Gold price – nominal and real (1968 = 100)
Gold (US$/oz),
Index 1968 = 100
1,200
1,000
800
600
400
200
0
1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Gold, (US$/oz, monthly average) Real gold price (US$/oz)
In common with other commodities, gold yields no coupon, dividend or cash

return. However, we have found that since 1987, gold performed well during
high inflationary periods in China. It also provides the benefit of holding value
during periods of deflation. Local investors have sought to protect their portfolio
wealth with gold as the store of value, as a currency.
Chart 45: Performance of Chinese Equities and Gold in Yuan (% annual return, Dec/Dec)
Chart 45: Performance of selected equities in China and Gold in Yuan (% annual return,
Dec/Dec)
Performance (YoY%) Inflation (YoY%)

200 7
6
150
5
100
4
50 3
2
0
1
-50
0
-100 -1
2001 2002 2003 2004 2005 2006 2007 2008 2009
SHCOMP (YoY%) SZCOMP (YoY%)
Gold (Yuan YoY%) Inflation (YoY%)
Note: SHCOMP = Shanghai Stock Exchange Composite Index, SZCOMP = Shenzhen Composite Index.
Source: the BLOOMBERG PROFESSONALTM service, IMF, WGC estimates
37
China gold report
Chart 46: Gold and Chinese inflation (year-on-year %)
Chart 46: Gold and Chinese inflation (YoY %)
Gold (Yuan, YoY%) Inflation (YoY%)

50 30
40 25
30
20
20
15
10
10
0
5
-10
-20 0
-30 -5
1987 1990 1993 1996 1999 2002 2005 2008
Gold price (Yuan YoY%) Inflation (YoY%)
Nearer term inflation risk in China remains skewed to the upside and should
support the gold price. A recent survey conducted by the Federation of Logistics
and Purchasing in China points to greater inflationary pressures, with rising
input and output prices13.
If inflation does materialise, then traditional inflation hedges such as gold are
likely to outperform other mainstream financial assets. Investors, who are unsure
whether to add an inflation hedge to their portfolio, should take solace in the fact
that gold can be shown to enhance an investors’ risk-adjusted returns over the
long term.
Gold – Chinese interest rates

We have examined the Chinese one-year best lending rate and local gold price
available on Bloomberg since 1997. If the past trend is indicative, history shows
the Chinese lending rate to be an unreliable indicator of future gold price in
local currency terms. As shown in the graph and the correlation results below,
the relationship between Chinese interest rates and the level of the Yuan gold
price has, at best, been uncertain since 1997.
13
The Daily Telegraph, 2 February 2010
38
China gold report
Chart 47: Gold (Yuan/oz) and China 1-year best lending rate (%)
Chart 47: Gold (Yuan/oz) and China 1-year best lending rate (%)
China 1-year
Gold (Yuan/oz) best lending rate (%)
9,000 11
8,000 10
7,000 9
6,000
8
5,000
7
4,000
6
3,000
2,000 5
1,000 4
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Gold (Yuan/oz) China lending rate (%)
Table 48: Correlation between China lending

rate and gold (Yuan/oz)
Time horizon from end of 2009 Correlation result
5-year -0.41
10-year 0.07
15-year -0.36
Source: The BLOOMBERG PROFESSONALTM service,

WGC estimates
The table above shows that for the past 15 years, there was a negative correlation
of -0.36 between the China lending rate and the Yuan gold price, however the
correlation over the last decade was a positive one (10-year: +0.07). Recent
results show that this relationship switched back to a negative correlation since
the gold price in Yuan terms continued to climb and the Chinese lending rate
declined.
Investment – conclusion
In summary, we believe that demand for gold will continue to be strong in the
future in the Chinese gold investment sector. With most policy makers, including
the US Federal Reserve, keeping short-term interest rates low to stimulate
economic recovery, money market rates are likely to remain near zero and below
historic levels for some time.
This suggests that the continued exodus from money funds in search of higher
yield, low risk assets will continue.
39
China gold report
Chart 49: China consumer confidence and gold (Yuan/oz, MoM%)
Chart 49: China consumer confidence and gold (Yuan/oz, MoM%)
China consumer
confidence index Gold (Yuan, MoM%)
120 20
15
115
10
110
5
105 0
-5
100
-10
95
-15
90 -20
Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08
China consumer confidence Gold (Yuan/oz, MoM%)
We expect that investors will continue to seek to build (or in some cases rebuild)
wealth while minimising the variability of returns, particularly as their confidence
in the economic recovery grows. Demand for gold by private investors as a long
duration capital preservation asset will therefore continue.
Given that the Chinese gold industry was liberalised less than a decade ago, it
is still a developing market in China. Total gold investment demand in China has
grown in line with the country’s GDP and population during this period and we
expect this trend to continue going forward.
Chart 50: Annual GDP (US$bn) and gold investment demand in China (t)
Chart 50: Annual GDP (US$bn) and gold investment demand in China (t)
US$bn Tonnes
10,000 100
8,000 80
6,000 60
4,000 40
2,000 20
0 0
2001 2003 2005 2007 2009 2011 2013
Nominal GDP (US$bn) Investment (tonnes)
Note: GDP figures based on IMF data.

40
China gold report
Chart 51: Population (mn) and gold investment demand per capita in China (t)
Chart 51: Population (mn) and gold investment demand per capita in China (t)
Gold investment
mn demand per capita (gm)
1,400 0.02
1,350
1,300 0.01
1,250
1,200 0.00
2001 2003 2005 2007 2009 2011 2013
Population (mn) Gold investment per capita (gm)
Note: Population figures based on IMF data.

Perhaps gold will play a greater role in risk management as new assets are
added to the portfolio mix to maximise total returns. In the periods considered,
gold is proven as a reliable diversifier which has consistently exhibited a lower
average volatility than most mainstream assets and commodities. We believe
the real value of gold for fund managers and pension professionals lies in its
capacity to provide a sure and steady means of enhancing the consistency
of overall investment returns giving funds the confidence to move back to a
managed extent into more risky assets.
Industrial demand
Industrial and dental uses account for nearly 12% of global gold demand or
an annual average of 428 tonnes from 2004 to 2009, inclusive. More than half
of the gold used in technical applications goes into electronic components
because of gold’s high thermal and electrical conductivity, as well as its
outstanding resistance to corrosion. While some substitutes are occasionally
used in electronic components (copper, silver or nickel etc), high reliability, long-
life and high performance components require gold. Gold is therefore found in
applications such as computer keyboard circuits and electrical contacts in IT
and military applications, as well as safety applications such as the contacts for
air bags in cars.
The contribution of electronics to total gold demand, which has grown overall
during the past decade, fluctuates according to global GDP and the fortunes
of the electronics industry. Most manufacturing of electronic components
containing gold occurs in North America, Western Europe or Eastern Asia.
41
China gold report
Chart 52: China Nominal GDP and gold industrial demand in China (yoy%)
Chart 52: China nominal GDP and gold industrial demand in China (YoY %)
YoY%
40
30
20
10
-10
-20
-30
1990 1993 1996 1999 2002 2005 2008
China nominal GDP (YoY%) Gold industry demand (YoY%)
The earliest medical uses of gold can be traced back to the Chinese in 2,500BC.
Today gold has medical uses in dental and other health care applications, such
as the use of gold wires in pacemakers, gold plated stents used in the treatment
of heart disease, implants for the eye and inner ear, and gold seeds used in the
treatment of prostate cancer. Gold drugs are effective in treating rheumatoid
arthritis.
Gold is also employed in a number of other industrial and decorative purposes

including gold plating and coating and in gold thread (used in textile work).
Various techniques are employed to enable gold to be used in decorative
finishes.
A number of new applications for gold have been and are being researched
to unlock new uses, some of which appear to have substantial potential in
increasing the industrial use of gold14. The use of gold as a catalyst in fuel cells
is one of the most exciting new developments in the gold market. A number
of companies are known to be developing industrial catalysts based on gold
and this could lead to important new demand for the metal, not least in the
automotive industry for the reduction of nitrogen dioxide gases from lean burn
engines, which currently consume large quantities of other precious metals
like platinum. Gold’s efficiency at cleaning up dioxins also throws open the
possibility of cleaning incinerator waste gases.
In the rapidly developing field of nanotechnology there are many possible

applications, including the use of gold in solar cells, improved LCD displays
using gold nanorods, for example, in mobile phones and laptops. Gold can
also be used in the development of new technologies to store terabytes of
data on a single disc or flash memory device. Mobile phones contain a higher
concentration of gold per unit than any other electronic device.
14
WGC’s Gold and nanotechnology in the age of innovation report, January 2010.
42
China gold report
Chart 53: China gold industrial demand (t)

Chart 53: China gold industrial demand (t)
Tonnes
20
18
16
14
12
10
0
1989 1992 1995 1998 2001 2004 2007
Demand in electronics Demand in other industrial application
China’s gold consumption in industrial applications has been steadily growing

over the past ten years and has averaged 15 tonnes of gold per annum during
this period.
There is potential for further growth owing to the rise of incomes and improvements
in living standards in China. Despite the rapid growth in the Chinese mobile
and electronic markets, the country’s population of approximately 1.3bn still
implies significant pent up demand. According to China Today, there were
338mn internet users in the country by the end of June last year, outnumbering
the total internet user population in the USA. China’s 3G population reached
9.77mn users by October 2009 and the country currently has approximately
440mn mobile phone users with the number of subscriptions still growing.
China Today also found that almost a quarter of China’s internet users were
regularly engaged in on-line shopping by mid-2009, which is 50% higher than
the previous year.
43
China gold report
Chart 54: Gold (Yuan/oz) and ITU China Mobile Phone Subscribers per 100 Inhabitants
Chart 54: Gold (Yuan/oz) and ITU China mobile phone subscribers per 100 inhabitants
Number of subscribers
Gold (Yuan/oz) per 100 inhabitants
7,000 60
6,000 50
5,000
40
4,000
30
3,000
20
2,000
1,000 10
0 0
Dec-92 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07
Gold price (Yuan/oz, LHS)

China mobile phone subscribers per 100 inhabitants (RHS)
Source: the BLOOMBERG PROFESSONALTM service, International Telecommunication Union, WGC estimates
Over the medium term, industrial demand is likely to recover as global economic
conditions and Chinese exports improve. In the longer term, WGC expects
industrial demand to rise following the potential launch of gold auto catalysts to
reduce carbon monoxide emissions, as well as growth in mobile phone usage
which is set to multiply among an expanding middle class. A total of 10.3mn
passenger cars were sold in China (up 6% from 2008) which means China
is likely to be the world’s largest vehicle market in 2009. Fairfax forecasts car
sales in China to increase by an average of 20% per annum between 2010
and 201415. China’s National Passenger Car Information Exchange Association
recently reported that China’s passenger car sales reached 1.1mn in December
2009 and sales figures may have exceeded 1mn units again in January 201016.
Automakers such as Dongfeng Peugeot Citroen, Changan Ford, and Shanghai
General Motors achieved record sales in December 2009, while sales growth of
Cherry Auto and Shanghai General Motors both surpassed 200% despite the
credit crunch and recession.
15
Miningmx, 28 December 2009
16
China4Auto.com, February 2010
44
China gold report
Chart 55: Gold (Yuan/oz) and China automobile output ('000 units)
Chart 55: Gold (Yuan/oz) and China automobile output (‘000 units)
Automobile output
Gold (Yuan/oz) (’000 units)
9,000 1,600
8,000 1,400
1,200
7,000
1,000
6,000
800
5,000
600
4,000
400
3,000 200
2,000 0
Jan-99 Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09
Gold (Yuan/oz) China automobile output (’000 units)
We expect the use of gold in the medical sector to continue to rise, particularly
considering the ageing population and improving medical facilities in China.
The table below shows the proportion of the population over 65 years of age in
China. This demographic will experience a robust growth over the next twenty
years as the baby boomers turn 65 in 2011. The growth in this age group is
expected to accelerate even faster in many parts of the world, driving increased
healthcare spending for decades to come.
Table 56: Largest > 65 populations globally
Rank Country Growth (mn) Growth (2008-2040*) (%) CAGR **

1 China 106 209 3.6
2 India 60 274 4.2
3 USA 39 107 2.3
4 Japan 28 30 0.8
5 Russia 20 34 0.9
6 Germany 17 41 1.1
7 Indonesia 14 223 3.7
8 Brazil 12 225 3.8
9 Italy 12 49 1.3
10 France 10 69 1.7
11 United Kingdom 10 66 1.6
12 Ukraine 7 23 0.6
13 Spain 7 45 1.2
14 Pakistan 7 206 3.6
15 Mexico 7 232 3.8
Source: Note* E=Estimates; ** CAGR=Compound Annual Growth Rate; U.S. Census Bureau, Kaiser Family
Foundation, International Data Base
45
China gold report
The demand for gold in industrial applications is also expected to rise rapidly
as China becomes the world’s manufacturing centre as a result of increased
purchasing power among private individuals. As we highlighted earlier, almost
80% of gold consumed in China is used to make jewellery.
Chart 57: Relationship between gold industrial demand in China (t) and price (Yuan/ oz)
Chart 57: Relationship between gold industrial demand in China (t) and price (Yuan/oz)
Gold industrial demand

in China (tonnes)
20
15
y = 0.002x + 5.1402
R2 = 0.6078
10
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

Gold (Yuan/oz)
Central bank – the People’s Bank of China
For centuries central banks have been regarded as the prime holders of gold as a
guarantee of their currency issuance, reserves and for settlement purposes. Total
global central bank ownership of gold reserves reached 30,190 tonnes as at the
end of January 2010. The United States, Germany, Italy and France held significant
gold stocks for many years while in the past China remained loyal to silver.
Table 58: Top 20 official gold holdings (January 2010)
Rank Country Tonnes Rank Country Tonnes

1 USA 8,133 11 India 558
2 Germany 3,407 12 ECB 501
3 IMF 3,005 13 Taiwan 424
4 Italy 2,452 14 Portugal 383
5 France 2,435 15 Venezuela 361
6 China 1,054 16 United Kingdom 310
7 Switzerland 1,040 17 Lebanon 287
8 Japan 765 18 Spain 282
9 Russia 641 19 Austria 280
10 Netherlands 612 20 Belgium 228
Note: The value of gold holdings is calculated using the end-January 2010 gold price of US$1,078.50 per troy
ounce (there are 32,151 troy oz in a metric tonne). Data for the value of other reserves are taken from IFS, table
‘Total Reserves minus Gold’. IMF balance sheet does not allow this percentage to be calculated.
Source: IMF (World official gold holdings as at the end of January 2010, March 2010 Report), WGC estimates
46
China gold report
Prior to October 2002, all gold producers in China were required to sell their gold
to PBoC. Under the 1983 Regulations on the Administration of Gold and Silver,
PBoC is the competent agent authorised to supervise and control the purchase
and distribution of gold and silver in China. The PBoC was responsible for the
state’s reserves of gold and silver, including their purchase, allocation and sale.
It also regulated and supervised the gold and silver markets.
With the exception of the USA and major European central banks, many other
central banks around the world hold either no gold or a very small percentage
ofChart
their59:total
Top official gold holdings reserves allocation (%)
reserve in gold, as illustrated in the below figure.
Chart 59: Top official gold holdings reserves allocation (%)
% of total reserves
100
80
60
40
20
0
USA
Germany
Italy
France
China
Switzerland
Japan
Russia
Netherlands
India
ECB
Taiwan
Portugal
Venezuela
UK
Gold Foreign reserves
Source: IMF, WGC estimates
This situation is beginning to change. Since the second quarter of 2009, the
central banks in some quarters have become net buyers of gold. Central banks
have moved to the demand side from the supply side. Most noteworthy was the
announcement by China’s State Administration of Foreign Exchange (SAFE)
that the country’s official reserves had grown to 1,054 tonnes from 600 tonnes.
This makes China the world’s sixth largest official holder of gold in absolute
terms after the United States, Germany, the IMF, Italy and France.
47
China gold report
Chart 60: Central banks net gold sales and total official sector gold holdings (tonnes)
Chart 60: Central banks net gold sales and total official sector gold holdings (tonnes)
Net central bank sales (tonnes) Total gold holdings (tonnes)

1,500 40,000
1,250
Net buyers Net sellers
38,000
1,000
750 36,000
500
34,000
250
0 32,000
-250
30,000
-500
-750 28,000
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Net central bank sales (tonnes) Total gold holdings (tonnes)
Note: For period ending January 2010.

Source: WGC estimates, IMF, GFMS
Several nations have also followed the Chinese as they reassess their long-term
strategic rationale and gold reserve holdings. The IMF’s International Financial
Statistics, which report the gold holdings of most central banks, also reported a
notable increase in Russia’s gold reserves in 2008 and during 2009, taking the
country’s gold reserves from 450 tonnes at the start of 2008 to 641 tonnes at the
end of 2009, or 5.1% of total reserves. According to Arkady Dvorkevich, Russian
Chief Economic Advisor, Russia will gradually step up its share of gold reserves
as a percentage of total reserves to at least 10%. In addition, Mr Dvorkevich
said last year that Russia would favour the inclusion of gold bullion in the basket-
weighting of a new world currency based on Special Drawing Rights issued by
the IMF17. Bloomberg reported that Russia’s central bank added 100,000 troy
oz of gold to its reserves in January 2010, increasing its holdings to 20.6mn
oz18. Recently, Alexei Ulyukayev, the First Deputy Chairman said that “Gold will
always be a natural quality asset” and that the Russian central bank seeks to
increase the share of gold in its international reserves19.
17
The Telegraph, 29 March 2009
18
Bloomberg, 19 February 2010
19
Bloomberg, 3 March 2010
48
China gold report
Chart 61: Gold reserves movement (tonnes)
Chart 61: Gold reserves movement (tonnes)
Tonnes
9,000
0%
8,000
7,000
6,000
5,000
4,000
-1.8%
-19.5%
3,000
0% -57.0%
2,000
-32.8% +0.2% +166.9%
1,000
-
USA Germany France Italy Switzerland Netherlands Japan China
2000 2009
Source: IMF, WGC
The volume of Chinese gold reserves rose 166.9% between Q1 2000 and Q4
2009. This increase helped push China’s gold as a percentage of total reserves
from a low of 0.9% in Q4 2008 to 1.6% at the end of 2009. This level is nonetheless
below the recent recorded peak of 2.2% in Q4 2002 and still well below that seen
in the Western world, suggesting that there is ample scope for further growth.
Chart 62: China and USA - gold as a percentage of total reserves (%)
Chart 62: China and USA – gold as a percentage of total reserves (%)
USA (%) China (%)

80 2.5
2.0
70
1.5
60
1.0
50 0.5
Q100 Q101 Q102 Q103 Q104 Q105 Q106 Q107 Q108 Q109
Quarter
USA(%) China (%)
Source: IMF, WGC
Over the past 10 years, we have seen China’s gold holdings slowly creeping
up, whilst the Western world’s central banks have been holding or selling gold.
49
China gold report
The figure below shows the change in gold holdings (in tonnes) since the first
quarter 2000 for China and the total of the top six major European central bank
gold holders (Germany, France, Italy, Switzerland, Netherlands and Portugal),
plus USA, IMF, European Central Bank and BIS.
Chart 63: Gold holdings for selected central banks (tonnes)
Chart 63: Gold holdings for selected central banks (tonnes)
USA, Top EU6, IMF, ECB and BIS (tonnes) China (tonnes)
30,000 1,200
25,000 1,000
20,000 800
15,000 600
10,000 400
5,000 200
0 0
Q100 Q101 Q102 Q103 Q104 Q105 Q106 Q107 Q108 Q109 Q100 Q101 Q102 Q103
Quarter
USA Top EU6 IMF ECB BIS China
Source: IMF, WGC
China’s total reserves (gold plus foreign exchange reserves) of US$2.4tn range
from two to 41 times the value of the G7 members’ reserves at the end of 2009.
China is already a major investor in US Treasuries but it looks as though China
Chart 64 : China’s total reserves per G7 member ratio (x times)
still has the “fire power” left in its books should the country decide to increase
its gold holding reserves.
Chart 64: China’s total reserves per G7 member ratio
Canada
UK
France
Italy
Germany
USA
Japan
0 5 10 15 20 25 30 35 40 45
2009 2000
Source: IMF, WGC estimates

50
China gold report
One factor that PBoC will consider when making a reserve balancing decision
is the future performance of the US dollar. Over the last 12 months, the US
dollar has depreciated against major currencies such as the Yen, Sterling
and Euro and has not fared well as a preserver of capital. However there is
no doubt that the US dollar will retain a role as a major reserve currency as
well as a transaction currency. China, along with Japan, are the biggest single
holders of US Treasuries and will certainly not benefit in precipitating a US
dollar crisis since this will further devalue their trillions of US dollars in reserves
and adversely impact the purchasing power of the US consumer – their major
export customer.
The State Council advisor Ji Xiaonan believes China should start investing
in at least 1,000 tonnes of gold per annum for its official reserves20. Mr Ji
has been quoted in the Chinese media as suggesting that the nation’s gold
reserves should reach 6,000 tonnes in the next three to five years and perhaps
10,000 tonnes in eight to 10 years. The adjustments could be motivated by the
following reasons: (1) Increasing gold as an essential component of PBoC’s
book could help the country meet future requirements in terms of safety and
diversification of the portfolio; (2) Purchasing gold using reserves would allow
PBoC to withdraw billions of Yuan now in circulation, decrease the proportion of
its US$2.4tn foreign currency reserves held in US dollar-linked investments and
ease pressure on the appreciation of the Yuan.
If the PBoC were to rebalance its reserve portfolio back to its recent peak ratio
of 2.2%, we estimate that the incremental demand from taking this action would
amount to around 400 tonnes at today’s gold price. Even an increase of 10%
on its current gold reserve holding would translate to approximately 100 tonnes.
These are sizable volumes that could place pressure on the country’s trade
balance.
PBoC has been purchasing local gold mine production and local refining of
recycled gold in local currency. We believe that the PBoC prefers not to be seen
switching out of the US dollar at this juncture when such a large proportion of
China’s foreign exchange reserves are already in dollar-denominated assets.
A withdrawal of such significant volumes out of the gold-hungry domestic

market would also further increase the domestic supply-demand gap in the
Chinese private sector and escalate the “snowball” effect in China. Hence, we
would not be surprised to see the PBoC proceed on a gradual strategy, if it
decides to increase its allocation.
The media has stated that China should allow its currency to appreciate against
the US dollar this year. This, in turn, would be bearish for the US dollar and
positive for real asset prices, such as gold, that are denominated in dollars.
20
China Youth Daily, November 2009
21
China Daily (3 July 2009) and Bloomberg (5 May 2009)
51
China gold report
According to China Daily, policy makers have said that they are studying the
idea of introducing more Yuan-denominated investment products in Hong Kong
with the aim of invoicing 50% of all transactions with Hong Kong in Yuan21.
At present, the Chinese Yuan is not fully convertible, although China intends
to further internationalise the currency. China has arrangements in place with
various countries ensuring trades can be settled directly in Yuan instead of US
dollars, which was previously the case. However, there is probably a limited
appetite for holding a currency that is not fully convertible and some uncertainty
about the possibility of devaluation as speculated by the press.
With ongoing uncertainties surrounding the US dollar and the Yuan, the search
for alternative international asset choices within the central bank sector would,
in our view, clearly involve consideration of gold.
52
China gold report
Supply in China
Overview
Gold production has a long history in China. According to Timothy Green22,

the existence of underground gold mining in China can be traced back to
600 AD. In the Hebei province, the mining of gold can be traced back to over
three thousand years ago. The Zhao Yuan gold mine in Shandong province,
north-east of Shanghai, claims to have been in production for over a thousand
years while other Shandong mines date as far back as the 17th Century.
The richest gold seam has always been in the Shandong Province. According
to research published by the China Mining Association, the Shandong province
produced almost a fifth of China’s annual gold production in 2008, followed by the
Henan and Fujian provinces. Shandong also hosts the majority of the country’s
prospective gold resources. Other major deposits are located in Hunan, Shaanxi,
Sichuan, Gansu, Yunnan and Guizhou. China refines its own gold production and
the majority of Chinese mines have refineries attached to them.
China’s gold industry has historically been unregulated, fragmented and

undercapitalised. The gold mining operations in China have typically been
artisanal, (e.g., small scale, inefficient and with little mechanisation.) Artisanal
mining extracted approximately 20-30% of the oxidised surface, as most
of China’s gold deposits are shallow, open pit operations and they are easily
processed. However, the remaining ore is much less attractive to develop, due to
high extraction costs and recovery levels. The underground deposits also require
more advanced mining technology and processing equipment for extraction.
In the early 2000s, China’s gold industry was cash-starved. A lack of government
subsidies meant that investment in gold mining exploration was low. This situation
was further compounded by gold’s lacklustre price performance. This prompted
local gold producers to look at public equity offers as a priority fund-raising
channel. In 2003, there were three listed companies in the industry – Zhongjin
Gold Corporation, Shandong Gold Co Ltd and Zijin Mining Co Ltd.
To maximise the potential of gold resources, China consequently opted to open

its door to foreign expertise and capital investment to set up joint ventures with
local mining companies. In recent years, numerous foreign mining companies
(including Eldorado Gold Corporation, Sino Gold, Goldfields and Goldrea
Resources Corporation) have taken this opportunity to enter China, drilling
porphyry gold/copper deposit, especially in the Shandong region.
Prior to 2002, the PBoC maintained control of mine purchases and the sale of
gold to retailers. Today, all gold production in China is required to be sold via
the SGE. The spot price at SGE is set by the matching system between buyers
and sellers on the computer trading system of SGE.
22
Timothy Green (The Ages of Gold)
53
China gold report
Mine supply
The graph below shows that global mine supply has been in a period of decline
since 2001. World gold mine supply increased by 6% year-on-year to reach
2,554 tonnes in 2009, despite a 12% increase in the average US dollar gold
price
Chart during the year.
65: Gold (USD/oz) and global mine supply (t)
Chart 65: Gold (US$/oz) and global mine supply (t)
Tonnes Gold (US$/oz)

3,000 1,100
2,500
900
2,000
700
1,500
500
1,000
300
500
0 100
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Global mine supply (tonnes) Gold price (US$/oz)
Source:
ChartGFMS, the producers
66: Gold BLOOMBERG PROFESSONAL
by country (2009)
TM
service, WGC
India
(512 t)
Chart 66: Gold producers by country (2009) 23%
China 13%
Other 29%
Australia 9%
Uzbekistan 4%
USA 9%
Ghana 4%
Indonesia 4% South Africa 9%
Canada 4% Peru 8% Russia 8%
Source: USGS, WGC estimates based on USGS data

54
China gold report
China overtook South Africa to become the world’s leading gold producer in
2007. China has continued to ramp up production, increasing output for ten
straight years to reach a new record in 2009 of 300 tonnes, based on the US
Geological Survey’s Mineral Commodity Summaries Report23. Conversely, gold
mining supply from South Africa continues to fall, albeit marginally, dropping to
210 tonnes in 2009, compared to 213 tonnes in 2008.
According to the latest statistics from the CGA, China produced 313.98 tonnes
of supply
Chart 67: Global mine gold and
in China's
2009,%an increase
share of output
of global mine 11%(t)year-on-year24.
CGA reported that the
top 10 gold firms in China produced around 47.31% (148.55 tonnes) of the
country’s total gold in 2009. The top producing provinces were Shandong,
Henan, Jiangxi, Fujian and Yunnan.
Chart 67: Global mine supply and China’s share of global mine output
Tonnes % of global mine supply

3,000 14
2,500 12
2,000 10
1,500 8
1,000 6
500 4
Chart 68: China mine supply1989 1992
(t) and gold (Yuan/oz) 1995 1998 2001 2004 2007
Global mine supply (tonnes) China % of global mine supply (%)
Source: GFMS, US Geological Survey, WGC, CGA
Chart 68: China mine supply (t) and gold (Yuan/oz)
Tonnes Gold (Yuan/oz)

350 8,000
300 7,000
6,000
250
5,000
200
4,000
150
3,000
100
2,000
50 1,000
0 0
1989 1992 1995 1998 2001 2004 2007
China mine supply (tonnes) Gold (Yuan/oz)
Source: GFMS Limited, US Geological Survey, WGC
23
US Geological Survey, Mineral Commodity Summaries Report, January 2010
24
55
China gold report
During the last decade, the main emerging market gold producers, Peru,
Russia and China, have increased their gold production by 44%, 34% and 84%
respectively. Elsewhere major producers in South Africa, Canada, USA and
Australia are experiencing substantial gold supply difficulties.
Chart 69: Gold mine production change between 1999 - 2009 (%)
Chart 69: Gold mine production change between 1999 - 2009 (%)
YoY%
100
80
60
40
20
-0
-20
-40
-60
South Africa Canada USA Australia China Peru Russia
% change
Source: GFMS, US Geological Survey, WGC
Growth in the output of gold in China and in reserves is one of China’s strategic
targets, contained within its Eleventh Five-Year Plan period (2006-2010). The
plan sets out the intention to increase China’s known gold reserve to between
3,000 and 3,500 tonnes and achieve an annual gold output growth rate of 5%.
In 2007, China moved three of its larger gold mines (Lan Nigou Gold Mine
in Guizhou and Tanjinshan in Qinghai) into production. Simultaneously, many
of South Africa’s gold mines have been reaching maturity. Despite this, South
Africa will continue to play an important role in global gold production, as the
country still hosts around 13% of current world gold reserves.
56
China gold report
Chart 70: Relationship between Chinese gold mine supply and gold price (Yuan/oz)
Chart 70: Relationship between Chinese gold mine supply and gold price (Yuan/oz)
Chinese gold mine

supply (t)
400
y = 0.0397x + 28.32
350
R2 = 0.856
300
250
200
150
100
50
0
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
Gold (Yuan/oz)
Source: GFMS Ltd, US Geological Survey, WGC, CGA
Gold Producers – domestic and foreign
China National Gold Group Corporation (CNGGC) is the leading gold producer
in China. CNGGC was established in 1979 and is a large-scale, state-owned
Chinese enterprise. It operates under the name China Gold Group and controls
the major gold mines in the country. The group is involved in all aspects of the gold
mining industry from engineering and fabrication of heavy mining equipment to
exploration, mining, refining and gold and silver bullion sales. CNGGC accounts
for approximately 20% of the total gold output in China and controls over 30%
of the known reserves in China. With more than 65 mines, CNGGC also controls
Zhongjin Gold Corporation, the first gold miner publicly listed on the Shanghai
Stock Exchange, since 2003. China Gold Corporation is the only Chinese
member of WGC and the only state-owned corporation authorised to forward
sell gold on the world markets. In 2008, CNGGC purchased a 42% stake in
Jinshan Gold Mines from Ivanhoe Mines, which owns the Changshan Hao 217
(CSH) gold mine in Tibet.
Shandong Gold Mining is also one of China’s leading gold producers. The China
National Development and Reform Commission in Beijing approved Shandong’s
new expansion initiative at its Jiaojia gold mine in 2009.
The charts below show the relative performance of the major Chinese gold
producers and big diversified players (Yunnan Copper and Jiangxi Copper)
versus the gold price in Yuan.
57
China gold report
Chart 71: Relative performance of major Chinese gold producers and gold price
Chart 71: Relative performance of major Chinese gold producers and gold price (Jan 2007 = 100)

900
800
700
600
500
400
300
200
100
0
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
Gold (Yuan/oz) Zhaojin CH Zijin HKY

Shangdong CH Zhongjin CH Lingbao Henan HK
Chart 72: Relative performance of selected Chinese diversified gold producers and gold price (Jan 2007 = 100)
Chart 72: Relative performance of selected Chinese diversified gold producers and gold price
(Jan 2007 = 100)

700
600
500
400
300
200
100
-
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
Gold (Yuan/oz) Jiangxi CH Yunnan CH
Table 73: Selected Chinese gold producers
Gold producers Ticker Currency Spot 1M (%) 3M (%) YoY (%)

Zhaojin 1818 HK HKD 15.2 -1.8% -6.6% 73.5%
Zijin Mining 601899 CH Yuan 8.18 -4.9% -21.1% 0.1%
Shandong Gold 600547 CH Yuan 69.5 -0.9% -16.0% 108.6%
Zhongjin 600489 CH Yuan 48.7 -5.3% -19.7% 127.0%
Lingbao Henan 3330 HK HKD 2.68 -0.4% -13.0% 0.0%
Jiangxi Copper 600362 CH Yuan 34.04 -5.2% -18.6% 100.2%
Yunnan Copper 000878 CH Yuan 24.86 -4.8% -21.6% 79.2%
Source: Spot as at 16 March 2010, the BLOOMBERG PROFESSONAL service, WGC estimates
TM
58
China gold report
Over the last few years, domestic gold production has risen as a result of an
increasing number of gold projects developed by foreign companies that have
come on stream. These companies entered China with the hope of becoming
significant players in both the Chinese and international gold industry. We
believe that the majority of the world’s top 10 gold producers have a presence
in China, either actively mining in the country, are involved in exploration or are
seeking new investment opportunities.
Chart 74: Top gold producers’ output (t) and their market share
Chart 74: Top gold producers’ output (t) and their market share
Tonnes Global market share (%)

250 12
10
200
8
150
6
100
4
50
2
0 0
Barrick
Newmont
AngloGold
Gold Fields
Harmony
Navoi MMC
Polyus
Goldcorp
Newcrest
Kinross
Production (tonnes) Market share (%)
Source: the BLOOMBERG PROFESSONALTM service, GFMS, Company data in 2008
Today, there are many foreign companies exploring and operating across China.
Eldorado Gold, a Canadian gold producer, has been the largest international
gold explorer and producer in China since the completion of its takeover of
Sino Gold Mining Limited in December 2009. Eldorado currently operates the
Tanjianshan mine in the Qinghai province. According to Eldorado, a feasibility
study on its Eastern Dragon Project in China was completed in early 2009 and
its first commercial gold production is anticipated in early 2011. The company
also owns Jinfeng Mine and White Mountain through its acquisition of Sino Gold
Mining. Other international companies that are involved in production in China
include Griffin Mining and Central China Goldfields Plc.
Rising cost of production
During the period from 1998 to 2000, GFMS Limited found that as many as 1,200
gold mining operations in China were loss-making, with supply issues such as
out-of-date mining equipment and poor technical execution compounding the
problem. The subsequent rise in the gold price and higher production levels
have helped local gold producers’ margins to improve. Nonetheless, one of the
major ongoing setbacks for Chinese mines is that, on an international basis,
they are mainly small in size and are scattered around the vast country.
59
China gold report
Ore grades vary enormously across different ore bodies around China.
Generally, larger deposits make up less than half of the country’s reserves,
but the ore is on average low-medium grade, which pushes up the cost of
developing domestic mines.
China’s gold production costs rose over 30% between 2003 and 2009 as a
result of low recovery grades and higher energy prices. However, these
companies have been helped by the rising gold price in US dollar terms, which
has increased significantly by more than the average total cost in China’s gold
mining industry during the same period.
Chart 75: Gold price, mine supply and total production costs in China verus USDCNY (indexed 2003 =100)
Chart 75: Gold price, mine supply and total production costs in China versus USDCNY
(indexed 2003 = 100)
Index 2003 = 100

230
210
190
170
150
130
110
90
70
50
2003 2004 2005 2006 2007 2008 2009
Mine supply (t) Total cost (Yuan/oz)

Gold (Yuan/oz) USDCNY Currency
Source: the BLOOMBERG PROFESSONALTM service, GFMS, Brook Hunt, WGC estimates
It is currently more attractive for China to produce gold rather than to import it,
notably because the weak US dollar and strong Chinese Yuan offer production
cost advantages. Hence we believe that China may continue to boost its
domestic production, at least in the shorter-term, to feed the country’s growing
appetite for gold.
However, whilst the rising gold price is a positive for Chinese miners, the industry
also faces challenges such as the high cost of developing new mines, rising
input costs and potential threats relating to supply disruption, tougher safety
regulations and depleting ore bodies.
Mine supply growth – taking a closer look at reserves

and resources
Metals Economic Group (MEG) estimates that over the past 10 years, 62 new
major gold deposits were discovered worldwide, with seven in Asia.
60
China gold report
Chart 76: Major discoveries by region (1997-2008)
No. of major
gold discoveries
30
20
10
0
Latin America
USA/Canada
Australia
Europe/FSU
Asia
Africa/Middle East
Pacific Ocean
Number of major discoveries
Source: Metals Economic Group; FSU stands for Former Soviet Union
The total world gold exploration budget reached a record high of $4.9bn in
2008. However, MEG found that gold’s share of the global nonferrous mining
exploration budget has almost halved from 64.6% in 1997 to 39.1% in 2008.
Several commodities (such as copper, iron ore and nickel) have outperformed
gold during this period and made capital expenditure investment in these
commodities far more attractive.
Chart 77: Annual gold exploration budgets by region (US$mn, LHS) vs. gold’s share of
Chartnonferrous
total 77: Annual Gold Exploration
exploration Budgets
mining by Region
budget (US$mn,
(%, RHS) LHS) vs.
between Gold 's Share of
1997-2008
Total Nonferrous Exploration Mining Budget (%, RHS) between 1997 - 2008
Gold’s share of total nonferrous

Budget (US$mn) exploration mining budget (%)
5,000 70
4,000
60
3,000
50
2,000
40
1,000
0 30
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Australia Canada Latin America Pacific/SE Asia

USA Africa RoW Gold’s share of total budget (%)
Source: Metals Economic Group

61
China gold report
MEG also estimates that whilst the total gold exploration budget has increased
four-fold between 1998 and 2008 (US$1.4bn), total gold production from the
world’s top 20 producers has risen by only 40% during this period, reaching
40.8mn oz in 2008.
Chart
Chart 78: Top20*
78: Top 20*gold
gold producers’
producers’ totaltotal production
production versusversus gold exploration
gold exploration budget budget
mn oz Budget (US$mn)
45 1,400
1,200
40
1,000
35 800
600
30
400
25 200
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total gold production of major producers (Moz)

Majors’ total gold exploration budgets (US$mn)
Note: *Excludes China National due to insufficient data. Zijin Mining’s statistics are estimates from 2000-2008 only.
Source: Metals Economic Group
There is considerable uncertainty and controversy surrounding the reserves of

gold present in China. In 2002, a joint report produced by the US Geological
Survey and the Tianjin Geological Academy on sedimentary rock-hosted gold
deposits in China, reported that there are more than 20mn oz of proven gold
reserves in sedimentary rock-hosted gold deposits. Additional estimated and
inferred resources are thought to be present in more than 160 deposits and
occurrences that were undergoing exploration in 2002. The largest deposits
discovered then in China were in Lannigou province (more than 3.2mn oz) and
Baguamiao province (over 2.5mn oz). Other estimates from the Ministry of Land
and Resource (MOLAR) found that the retained gold reserves of China were
estimated to be approximately 4,000 tonnes at the end of 2000, 60% of which
was rock gold, 12% gold dust and 28% associated gold.
The China Geological and Mineral Survey Bureau estimated the country’s
prospective gold resources at approximately 15,000 tonnes. The Chinese
Geological Survey Bureau (CGS) reported that five major gold mines were
discovered in China during 2007. These include four pure gold mines at Dachang
(Qinghai province), Yangshan (Gansu), Sizhuang (Shandong), Baolun (Hainan)
and a copper and gold mine at Gandise in Tibet’s Autonomous Region. CGS
projected that the five mines have a combined gold reserve of 600 tonnes, while
prospects for further discoveries at these sites remain strong. In 2008, China’s
total gold resources were forecast to be between 15,000 and 20,000 tonnes,
according to CGA25. CGA also stated that the Yangshan deposit in north Western
China has resources of 308 metric tonnes and is the largest in the country.
25
5th Shanghai Derivatives Market Forum in 2008; Bloomberg May 2008
62
China gold report
China appears to have gold in some abundance as evidenced by the increase

in output over recent years. However, China’s future prospects for gold supply
look to be limited, because its gold life reserves are limited when compared to
reserves in other minerals such as molybdenum, tungsten, iron ore and copper.
The exception is nickel as China has been able to increase its own nickel pig
iron output by purchasing laterite-type nickel ore from nearby sources such
as Papua New Guinea and the Philippines, especially after the collapse in the
global nickel price.
Chart 79: Life of mine reserves for selected commodities at 2009 production levels in China
Chart 79: Life of mine reserves for selected commodities at 2009 production levels in China
Life of mine (years)

45
40
35
30
25
20
15
10
0
Moly. Tungs. Copper I/ore Bauxite Tin Nickel Zinc Silver Lead Gold
Note: Moly. = molybdenum, I/ore = iron ore and Tungs. = tungsten.

Source: WGC estimates based on US Geological Survey data, January 2010
According to CGA, the total number of gold producers in China has dropped by
almost half, from over 1,200 in 2002 to approximately 700 in 2009. This is mainly
attributable to shut downs and the integration of some small and obsolete gold
producers around the country.
China is already the world’s biggest producer and second largest consumer
of gold but has only 4% of total world’s reserves, with total basic reserves
amounting to 1,900 tonnes, according to the US Geological Survey (USGS) in
200926.
26
US Geological Survey, Mineral Commodity Summaries Report, January 2010
63
China gold report
Chart 80: Breakdown of gold reserves by country (2009)
Chart 80: Breakdown of gold reserves by country (2009)
South Africa 13%
Other 35%
Australia 12%
Russia 11%
Uzbekistan 4%
USA 6%
China 4%
Chile 4% Brazil 4% Indonesia 6%
Source: US Geological Survey, January 2010
Assuming the 2009 USGS mine production and reserves figures are correct,
China may exhaust existing gold mines in six years or less if Chinese demand
continues to grow strongly. Current industry sentiment echoes this hypothesis:
Zijin Mining Group, one of the leading gold producers in China, stated in a 2007
Bloomberg interview that China’s existing gold mines will run out of ore in six
years27. In contrast, other countries such as Indonesia, Russia, South Africa and
Australia each
Chart 81: Life of goldsit onreserves
mine more bythan 20(2009)
country years of the world’s known gold reserves.
Chart 81: Life of gold mine reserves by country (2009)

60
50
40
30
20
10
0
Chile
Brazil
Indonesia
South Africa
Russia
Australia
Mexico
Uzbekistan
Ghana
USA
Canada
Peru
China
Papua New Guinea
Source: WGC estimates based on US Geological Survey data, January 2010
27
Bloomberg, 6 December, 2007
64
China gold report
After taking a closer look at the domestic supply and demand balance in the
Chinese market, we expect supply growth to be challenging in the medium
to long term and see a decline in future supply unless there is more funding
directed to gold exploration.
In the government’s white paper on China’s Policy on Mineral Resources

(December 2003), China stressed that it will rely on the exploitation of domestic
mineral resources to guarantee the needs of its modernisation drive. However,
the various statistics discussed above would suggest that China’s gold
resources are still relatively undiscovered, which could create new opportunities.
According to G-Resources Group Limited’s 2009 presentation, Asia attracts only
4% of global exploration expenditure28. Hence further work would be required
to examine China’s standard gold reserves and resources, as well as defining
its full exploration potential.
Gold mining is, however, an extremely lengthy process, taking five to eight years
from prospecting to production. It can also take years to re-open a closed mine.
Such long lead times mean production cannot easily respond to exploit a rising
gold price.
Any potential supply constraint may lead to mergers and acquisitions, as China
will have to look for deals to grow its gold resources and reserves. In 2008,
Ernst & Young found that most Chinese mining companies were financially
strong, reflecting high turnover levels in recent years, as well as successful fund
raising efforts29. These Chinese mining companies are also set to benefit from
a strong Yuan, making foreign mining and metals assets even cheaper for a
Chinese buyer.
Through the economic downturn, announcements started to emerge from local

companies seeking to buy gold assets overseas as assets abroad became
cheaper. In November 2007, Zijin Mining acquired a 20% interest in a Philippine
gold project from Lepanto Consolidated Mining Co, having paid US$55.1mn
for a controlling stake in JV Zeravshan LLC, Tajikistan’s biggest gold producer.
Zhaojin Mining Industry Co has also been looking to invest outside of China.
According to an interview with Bloomberg, Zhaojin said the company had
examined several projects in countries such as the Philippines and Burma30. In
October 2009, Minmetals Corporation, the Chinese state-owned metals trader,
said it is looking to acquire gold mines in Australia and Canada31.
Assuming a long term gold supply growth of 5%, which is in line with the target
set out in the Eleventh Five Year Plan, we believe the Chinese gold market could
most likely continue to be in disequilibrium. WGC believes that the limited size
of gold reserves and resource forecasts may restrict new supply unless there is
further investment in exploration in China’s gold industry, especially if existing
domestic production lags behind current demand.
28
Gold: The Perfect Metal, Golden Era – Growing Potential Investment Forum Hong Kong, 2009
29
Ernst & Young, The year when cash is king, 2008
30
Bloomberg, 6 December 2007
31
Reuters, 22 October 2009
65
China gold report
Recycled gold
Recycled gold could threaten the gold supply demand dynamics in China because
flows have been playing a more significant role in the gold supply market.
Chart 82: Global gold supply by source (%)

Chart 82: Global gold supply by source (%)
% by source
100
80
60
40
20
-20
1980 1984 1988 1992 1996 2000 2004 2008
Mine production Official sector sales Scrap
Net producer hedging Implied net disinvestment
Source: GFMS, WGC, CGA
Recycling is the most volatile part of supply, but in many ways it acts as a natural
market stabiliser. Recycling activity tends to increase sharply when the price
spikes up, releasing supply into the market. In the first quarter of 2009, global
gold supply spiked sharply as a result of higher contribution from recycling
levels. However, recycling flows reduced significantly in the remaining quarters
of the year, despite the higher gold price environment32.
Turkey has been the largest global supplier of recycled gold, contributing
199 tonnes or 16% of the total in 2008. China ranks seventh, with the flow of
recycled gold up 57% year-on-year to 62 tonnes in 2008. This amounts to around
5% of the global supply of recycled gold.
32
WGC, Gold Demand Trends, Q409 and Full year 2009, February 2010
66
China gold report
Chart 83: Top recycled gold supplier in tonnes (2008)
Chart 83: Top recycled gold supplier in tonnes (2008)
Tonnes
200
160
120
80
40
0
Turkey
USA
India
Indonesia
Saudi Arabia & Yemen
Italy
China
Thailand
Egypt
Pakistan & Afghanistan
Japan
Iran
UAE
CIS
Malaysia
Mexico
France
Iraq and Syria
UK & Ireland
South Korea
Source: GFMS, WGC
During the ten year period from 1998 to 2008, China’s supply of recycled gold
rose by 40 tonnes. This, together with Turkey’s increase of 147 tonnes, was
more than offset by the combined fall in recycled gold supply coming from
Indonesia and South Korea.
Chart 84: Recycled gold supply movement in tonnes(1998 - 2008)
Chart 84: Recycled gold supply movement in tonnes (1998-2008)
Tonnes
150
100
50
0
Turkey
Italy
USA
China
Pakistan & Afghanistan
Iraq and Syria
UAE
Iran
Mexico
UK & Ireland
France
India
Spain
Malaysia
CIS
Germany
Saudi Arabia & Yemen
Vietnam
Indonesia
South Korea
-50
-100
-150
-200
-250
-300
Source: GFMS, WGC

67
China gold report
Historically, the jump in recycling flows has been spurred on by a combination

of a higher gold price and distressed selling, particularly in the record highs
of late 2008 and early 2009. The Asian currency crisis of the late 1990s also
triggered a sharp jump. The graphs below show that, since 1989, there has been
a strong relationship between the flow of recycled gold coming into the market
and the gold price in local currency terms. An exception, in the post deregulation
period, occurred in 2007 when Chinese recycling volumes fell by 11% year-on-
year to 20 tonnes. We believe the Chinese consumers are not responding to a
higher gold price and selling scrap gold because they are catching up to their
foreign counterparts in terms of gold ownership levels. This is also reflected in a
23% year-on-year rise in total Chinese jewellery consumption during that year.
Chart 85: Global recycled gold supply (t) and gold (Yuan/oz)
Chart 85: Global recycled gold supply (t) and gold (Yuan/oz)
Tonnes Gold (Yuan/oz)

1,800 8,000
1,600
7,000
1,400
6,000
1,200
1,000 5,000
800 4,000
600
3,000
400
2,000
200
0 1,000
1989 1992 1995 1998 2001 2004 2007
World recycled gold (tonnes) Gold Price (Yuan/oz)
Source: GFMS, the BLOOMBERG PROFESSONALTM service, WGC
WGC believes that Chinese consumers are in the process of accumulating

gold, which suggests that they are – and will be – less willing to sell back their
holdings in response to higher gold prices. Conversely, consumers in other
countries are responding to high prices by selling gold items.
68
China gold report
The long-term outlook for the Chinese

gold market
The long-term outlook for the Chinese gold market remains positive. At present,
the market continues to be in disequilibrium since the deregulation of the
domestic gold industry. Chinese consumers are catching up relative to the
Western world in terms of gold ownership. This is because market liberalisation
tends to have a dramatic impact in a local market. In India, for example its
gold consumption more than doubled from roughly 300-350 tonnes in the early
1990s to over 700 tonnes at the end of 2008 when the liberalisation process
was in full swing.
Chinese gold demand has increased by 106% from 2002 to an estimated

443 tonnes in 2009, or an average of 8% per annum during the same period.
Nevertheless, the country has one of the lowest gold consumption intensity
rates compared to Western economies, and to countries with similar gold
cultures. In 2009, per capita gold consumption in China was 0.33gm, up from
0.17gm in 2002. WGC estimates that total incremental demand based on 2009
consumption and IMF population forecasts, ranges from 1,000 tonnes at USA
and Japanese per capita consumption levels to more, if Chinese consumption
per capita were to rise to Taiwanese levels.
Over time, we believe there is also a significant potential for growth in Chinese
gold jewellery demand, which represents the vast majority (78%) of the domestic
gold market. According to WGC analysis of the Chinese jewellery market, we
found per capita consumption of 0.26gm in 2009 to be low. If gold jewellery
were consumed in China at the same rate per capita as in India, Hong Kong or
Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes to
as much as 4,000 tonnes in the jewellery sector alone.
Net retail gold investment is still developing in China. Investors looking to protect
their wealth, and institutional and retail investors looking to manage portfolio risk
are increasingly turning to gold.
PBoC is also playing an increasingly supportive role on the demand side. We

believe the reasons why central banks such as the PBoC would want to own
gold are the same as the reasons why investors would want to own gold –
namely its diversification properties, insurance against unexpected events and
gold’s ability to outperform during crises. To recap our earlier analysis, if PBoC
decides to rebalance its books back to its recent peak gold holding ratio of
2.2% at Q4 2002, we estimate that the incremental demand would amount to a
further 400 tonnes at the current gold price. The ratio is nevertheless a fraction
of the other key economies such as the USA (70.4%) and Germany (66.1%).
In the past, Chinese mine production has been driven by gold prices. However,
despite the sharp rally that we have seen in the gold price and a 63% jump in
mine production since 2001, the Chinese gold industry is simply not responding
fast enough to bring in new supply. During the period from 2006 to 2009, average
annual gold mine output grew by 8% per annum in China. This is more than the
69
China gold report
targeted growth rate of 5% set out in its Eleventh Five-Year Plan (2006-2010)
and it is more than three years since China moved three of its larger gold mines
into production.
On a longer term basis, supply issues such as higher mine development costs,
rising input costs and potential threats relating to supply disruption, tougher
safety regulations and depleting ore bodies could put a much higher floor under
the gold price than was previously the case.
Chinese gold demand has the potential to double from today’s levels within a
decade. Assuming that long term gold demand growth is in line with the supply
growth target of 5% per annum (as set out in the Eleventh Five Year Plan),
China could experience strong demand for decades to come. Demand growth
looks set to continue to outpace global and domestic production capacity. The
limited range of gold reserves and resources forecasts may restrict new supply,
especially if existing domestic production lags behind demand. This shortfall
creates a “snowball” effect as China’s gold industry may not be able to catch
up with the annual leap in domestic consumption. This would effectively extend
the gold cycle in China.
70
China gold report
Conclusion
Over the past few years, China has experienced economic prosperity and rapidly
increasing wealth. The Chinese economy grew at an unexpectedly high growth
rate of 8.7% in 2009, with GDP reaching 10.7% in the last quarter. The country
also saw rapid growth in foreign direct investment, fixed asset investment, new
loans and rising money supply. During the same period, the Western world
faced deep recession and is only now beginning to recover.
Continuous improvements in living standards, higher savings rates amongst

private individuals and rising income levels are expected to generate robust
gold demand in China. The World Bank (WB) recently raised its China GDP
growth forecast for 2010 from 9.0% to 9.5%33. WB said that Chinese trade and
household consumption should continue to grow strongly as the stimulus is
withdrawn. The ongoing structural shift in Chinese gold demand and supply,
as well as the structural trends within the world’s second largest gold market
potentially creates a brave new world for China’s gold industry. Today China has
an insatiable appetite for gold which looks likely to continue in an environment
where domestic mine supply lags behind demand.
Looking further ahead, WGC expects Chinese gold demand to double from
today’s levels over the next decade. Jewellery and investment growth are
expected to be the chief drivers of this demand. The motives that drive demand
in those sectors can differ: Jewellery is cyclical, and investment demand has
both a cyclical and counter-cyclical element to it.
There is a strong growth opportunity in the gold jewellery market given the
very low per capita consumption of gold jewellery in China, which has almost
doubled since the deregulation of the market. The recent financial crisis has
also increased caution in Asia and made Asian investors aware of the need
for a hedge against the possibility of further weakening in the US dollar, to
which they are heavily exposed. Gold’s dollar hedging properties make it both
appropriate and ideal for this purpose.
There has recently been much talk of impending inflationary fears in China.
According to China’s Premier Wen Jiabao, inflation will be a key challenge
as the country tries to keep its recovery on track34. In February 2010, China’s
inflation rose 2.7%, which is close to the government’s official cap of 3.0% for
2010. In addition, WB also warned about asset bubbles in real estate and the
prospect of inflationary pressures in China. Whether inflation appears next year
or the year after that, we believe it is likely that the recovery of major economies
could go from one extreme to another. Global financial systems are still relatively
unstable and it will be very difficult for central banks to manage their way of out
recession without inflation becoming an issue. Since the latter part of 2008, the
monetary and fiscal stimuli injected by governments and central banks around
33
Associated Press (16 March 2010)
34
The Telegraph (17 March 2010)
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China gold report
the globe have been sizable. Historically, gold has proved itself as an effective
hedge against inflation over the longer term and it tends to outperform the
market during periods of extreme inflation.
China has also recently confirmed its economic growth target of 8.0% for 2010
but Premier Wen has cautioned that the country “will still face a complicated
situation, both at home and abroad” and is trying to maintain a balance between
the economic growth required to create employment for its 1.3bn people and
avoiding overheating its economy35. Time will tell how China will evolve, as
the nation faces multiple challenges in the wake of the global financial crisis.
With ongoing uncertainties surrounding the economic recovery, currency and
inflation, the search for alternative international asset choices for both investors
and the central bank should, in our view and for the reasons outlined in this
report, clearly involve consideration of gold. Investors may be mindful that
the volatility that we have seen in the past two years is not necessarily an
isolated event and we may have to prepare for a more protracted recovery than
in past cycles.
The real value of gold for investors lies in the reliable diversification it provides
and its low correlation with other assets. This reflects the unique and diverse
drivers of gold demand and supply. Gold also consistently delivers a lower
average volatility than most mainstream assets and commodities.
Gold can be seen as an insurance policy. Gold is an effective hedge and gives
investors the confidence to manage unknown risk. Its value holds in good times
and bad. Gold is one of only a few assets that have the ability to show resilience
during extreme conditions.
Gold as an asset class has performed impressively for nearly a decade, both in
China and internationally. Today, the combination of a healthy outlook for gold
demand and its relatively inelastic supply creates a bright future for gold, and
one which China is well placed to capitalise on.
35
Reuters (13 February 2010)
World Gold Council
55 Old Broad Street
London
EC2M 1RX
United Kingdom
Tel +44 (0)20 7826 4700
Fax +44 (0)20 7826 4799
Email info@gold.org
www.gold.org
WGC-HO-GEN-024 April 2010

Gold Report China

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CHINA GOLD REPORT

Gold in the Year of the Tiger

As the gold industry’s key market development

The WGC is a commercially-driven organisation and

Gold demand in China – a new world of opportunity 8

The long-term outlook for the Chinese gold market 68

Gold in the Year of the Tiger

Today, gold is regarded as a sign of prosperity, an ornament, a currency and an

Cumulative supply (t) Cumulative demand (t) Gold (Yuan/oz)

Source: GFMS Limited, WGC estimates

The People’s Bank of China (PBoC) is also playing an increasingly supportive

WGC analysis shows that, structurally, supply growth in China could be

Jewellery is by far the most dominant category of Chinese gold demand,

Chinese gold consumption in industrial applications has been steadily growing

Recycled gold supply is a wildcard in China. However, we believe that Chinese

Gold demand in China – a new world

Gold is a symbol of wealth in Chinese culture. The children of affluent Chinese

Overview of the early gold market

The State Council

China National Gold Group China Gold Shanghai Gold Exchange

Source: WGC and China Financial Services

Recent economic trends

Chart 3: Gold (Yuan/oz) and China real GDP growth (%)

Gold (Yuan/oz) Real GDP growth (YoY%)

Chart 4: Gold (Yuan/oz) and China Nominal GDP (US$bn)

Chart 4: Gold (Yuan/oz) and China nominal GDP (US$bn)

Gold (Yuan/oz) Nominal GDP (US$bn)

Chart 5: Gold (Yuan/oz) and China FDI (US$bn)

China FDI (US$bn) Gold (Yuan/oz)

Source: the BLOOMBERG PROFESSONALTM service

Chart 6 Gold (Yuan/oz) and Chinese PMI Manufacturing Index

Gold (Yuan/oz, LHS) PMI manufacturing index (points, RHS)

Source: the BLOOMBERG PROFESSONALTM service

Chart 7: Gold (Yuan/oz) and China PMI New Orders

Chart 7: Gold (Yuan/oz) and China PMI new orders

Gold (Yuan/oz) China new orders PMI (points)

Source: the BLOOMBERG PROFESSONALTM service

This includes a strategic purchasing policy (i.e. restocking), implemented

Table 8: List of selected Chinese natural resource acquisitions announced

2007 Chinalco Peru Copper Inc. Peru Copper 860

We believe this to be a long term strategy of China – to invest its wealth, to

Table 9: Fiscal stimulus announcements in 2008

Selected country US$bn Comments

China announced a fiscal stimulus measure of approximately US$586bn (or 4tn

Gold (Yuan/oz) Money supply M2 (Yuan bn)

Source: the BLOOMBERG PROFESSONALTM service, PBoC

Table 11: Estimated Global Bank write-downs (2007-2010E)

Domicile Est. holdings of loans Breakdown Est. total write-downs Breakdown

Source: IMF (Global Financial Stability Review, October 2009)

Chart 12: China's share of global gold demand (%)

Demand continues to strengthen in China

Chart 12: China’s share of global gold demand (%)

Global gold demand (tonnes) China's share (% of global)

Note: China gold consumption figure excludes PBoC purchasing.

Today, China’s gold market is enjoying the benefits of liberalisation and

Chart 13: China gold demand by application (2009)

Source: GFMS, WGC estimates

Chart 14: Global gold consumption intensity

Note: Demand excludes central bank purchases.

China* (tonnes) Demand per capita (gm)

Note: *Figures exclude the PBoC gold purchasing.

Index Jan 2005 = 100

Yuan US$ Indian Rupee Euro Yen

Source: the BLOOMBERG PROFESSONALTM service, WGC